Offsite Manufacture and Modular Construction: Impact on Risk?

Offsite manufacture and modular construction are part of what we now term Modern Methods of Construction, or “MMC”.

This is a key element of our changing industry, alongside digital engineering and onsite  technological advancements.

Offsite manufacture has been in resurgence for housing developments and large commercial builds across the world, with North America leading growth, followed closely by Asia Pacific. Use in the UK is also increasing; in surveys of delegates taken at conferences over the last year, it has scored consistently in the top three impacts to change, alongside BIM and digital engineering.

In the UK, modular construction has historically seen barriers to uptake due to a tarnished image from post war prefab housing developments, with sub-par manufacture and onsite integration issues. However, with recent technological advancements in both assembly line process control and digital design, many new start-ups are providing a one stop shop solution, from catalogued design through to integration onsite. To compete, many traditional large D&B contractors such as Bouygues, Network Homes, and Swan Housing have created in house MMC divisions, with some moving the actual manufacturing of components or units to their own factories. [1][2] 

What is Offsite Manufacture and Modular Construction?

There are various degrees of offsite manufacture, from using components like walls, panelling, stairs, roofs, and sub structural frames, to whole housing units or modular fitted out rooms being produced in a factory before delivery to site. All of which can be integrated with existing buildings. This means our homes and places of work can be produced in similar fashion to how the aerospace and motor vehicle industry have always done things. There are many benefits, but also many challenges to working in this way.  

Impact on Risk?

A key issue for the Insurance sector given it’s inherent “reactive not proactive” nature, is whether faith can be held that implementation of modular and offsite manufacturing is positive, until such time as we have long tail claim data to judge. Currently there are points to both answers to this question.

Positive Impacts on Risk Reduction  

• The advantages of a factory-based process are controlled conditions, meaning projects are not at the mercy of the UK’s weather reducing downtime. Also, high quality control and consistency checks mean snagging is minimised and costs of defects on insurance are reduced.
• Fewer skilled people are required onsite, thereby reducing “human error” implementing designs to the build. The associated negative impact on employment rates from traditional onsite skill sets, e.g. brick layers, are mitigated by giving new employment avenues for skilled manufacturing operatives from other shrinking UK manufacturing sectors, such as UK automotive. [3]
• Factories are safer, more controlled environments compared to building sites, meaning we may see less claims under an Employer and Public Liability policy.
• Construction activities that would ordinarily have to be sequenced can now be performed simultaneously, again reducing the period of construction projects which ultimately reduces cost and insurable delays.
• Material supply chain risk for the offsite pre-construction would be the same or less than conventional construction. Modular companies could in fact have better supply access and stocking capacity than site-specific construction.

 Possible Risk Issues 

• In some cases modular builds have enabled fires to spread more quickly, especially as many units tend to be timber framed; for example, fire can spread through oxygen locked into the lightweight modular ‘building block’ materials, or cement exteriors falling from wall panels exposing flammable polystyrene interiors. [4][5]
• Modular buildings are often designed to look like they’re made from traditional materials, making assessing risk by sight not as easy for surveyors or tradesmen. Also this is an issue for fire fighters unfamiliar with the structures or materials. [6]  
• Having one firm capable of the manufacture of the units, rather than a series of smaller contractors assembling the entire building onsite can create more vulnerability due to the narrow supply chains. If one company goes under in the supply chain, it can cause issues for practical completion costs and delays.
• Unless the Intellectual Property is licenced to the developers from a modular manufacturer, and full designs of components are held within build documents, it is easy to foresee issues of future misunderstandings of a building’s make up.
• Increased use of cranes may be needed on site for relatively small projects, affecting denial of access to surrounding properties, which is insured on many types of building policies.
• Transporting whole units is a complex endeavour, with the completed modules themselves being damaged or destroyed in transit causing major construction delays. Also, road traffic incidents are a concern and careful thought around site access is needed.
• There is some evidence that a number of materials used in offsite construction are more susceptible to water damage. [7]
• It is easy to foresee more manufacture of whole component units abroad, potentially from less regulated territories meaning lower risk management in design and manufacture, and this could introduce marine transit and jurisdictional risks. This also raises environmental and sustainability concerns with certain overseas producers not working to the same carbon footprint targets as the UK. It therefore becomes important to carbon track components as much as possible.
• Surveyors should be given access to the assembly line; otherwise gaps in their reports at PC can create losses to all parties Insurances. 

Professional Indemnity Insurance (PII) Policies 

A core problem with offsite modular construction is the potential for a design or manufacturing error to repeat itself in all components on a single project, or multiple projects, which is not always insurable for PII underwriters. Also, PII policies are written with product exclusions, excluding product sales, product recall, or product warranty. Whether a module or prefabricated unit is an actual “product” is yet to be fully tested in law. [8] It is advised that the products exclusion under a PII policy is looked at, something we at Howden have considered with the writing of our Howden RICS 2020 policy wording. In any case, the RICS minimum terms policy wording does not contain any exclusions or conditions specific to surveying or valuation of a modular built property, but the survey related risk issues described above could easily lead to claims against your PII. In regards construction services, including design, a project specific Insurance policy may be better to make sure nothing falls through the gaps between PII and other policies.

In Summary

As the field is untested, contractors’ insurance, including liability insurance premiums for sites using offsite techniques, could be more expensive with higher excesses and more exclusions. Therefore this view could be passed down to any RICS members heavily involved in construction services in this sector, though unlikely in the building survey, and valuation sector. We are seeing some contractor all risks insurers demand more onerous surveys, and higher levels of risk management, if manufacture is outsourced.

Despite this, some insurers are starting to see the positive points made earlier around assembly line quality control, but underwriters could ask;

• Is the business performing their own additional Quality Assurance on supplied modules or prefabricated units? 
• Do they require their manufacturers to maintain PII coverage?  
• Geography becomes a consideration as well - are transport-to-site times short, and transit conditions easily monitored?

In the future we may see new Insurance products being developed to follow the journey of offsite manufacture and wider MMC. It will be interesting to see the claim rates over time if the industry does adopt these new forms of build fully. In the end, the question of the impact on risk may only be answered in time. To discuss your PII requirements, please call me on: 0207 133 1425 or complete the get in touch form below.

References: 

[1] https://www.swan.org.uk/home/news/swan-welcomes-nadhim-zahawi-mp,-minister-for-business-and-industry-to-its-modular-housing-factory-in-basildon.aspx 

[2] https://www.buildoffsite.com/content/uploads/2019/09/mmc-guide-2019.pdf 

[3] https://www.telegraph.co.uk/business/risk-insights/modern-methods-of-construction/ 

[4] https://www.telegraph.co.uk/business/risk-insights/modern-methods-of-construction/ 

[5] https://www.coreatlantic.co.uk/news/construction-mmc-offers-benefits-but-also-three-key-risks/37914/ 

[6] https://www.telegraph.co.uk/business/risk-insights/modern-methods-of-construction/ 

[7] https://www.building.co.uk/communities/insurance-the-known-unknowns/5073985.article 

[8] https://axaxl.com/fast-fast-forward/articles/insuring-modular-construction_casualty-considerations