MMC, ownership and risk

Modern Methods of Construction (also known as MMC) are a potential gamechanger for the construction industry; bringing improved efficiencies to the construction process, addressing skills shortages, creating better quality products and helping to achieve the all-important net zero standard. What constitutes MMC can vary widely but for some MMC - like large modular elements - the traditional construction risk profiles, particularly concerning ownership of materials, need additional thought and care when negotiating contracts.

How does ownership of modular materials differ between traditional construction and MMC?

The point at which ownership of materials passes from the contractor to developer will vary depending on the terms of the contract. For projects where there is no modular MMC component, contracts usually say ownership passes on delivery (the NEC approach) or upon payment (the JCT approach).

However, if a project contains a significant MMC element, say, large modules being assembled off-site and then delivered and installed on site, the position may need to be different - particularly if the developer is paying significant amounts towards the modules ahead of their delivery. In this scenario, the timeline and specifics of delivery, ownership and risk should be discussed between the contractor and developer and built into contract agreements to avoid disputes at a later stage.

What are the ownership and risk challenges that developers need to be aware of for MMC projects?

If not properly amended, standard construction contracts are often unsuitable for MMC projects, and use of inappropriate or irrelevant terms could result in confusion and lead to disputes or problems completing projects later down the line, particularly in the event of MMC supplier insolvency. So, what do developers really need to consider?

What is suitable, appropriate or relevant will very much depend on the project and the type of MMC involved. So, first off, a good understanding of the MMC elements of the project - and risk areas involved - is essential.

For example, with modular MMC, where the manufacture of the modular units is taking place offsite, it is not unreasonable for the supplier to request stage or monthly payments for modular parts that have yet to reach the site (and may not reach site for a number of months). Of course, paying money upfront is risky for developers in case the offsite manufacturing process halts for any reason; but similarly, it is unreasonable to leave the supplier having to stump up potentially significant sums until the modules are delivered to site. In this case, flexible staged payments are a good option (rather than the monthly instalments that the industry would normally use) – payment of agreed sums on achievement of set stages in the manufacturing process, and further payments once the modules are delivered and installed on site.

For the most substantial payments before delivery to site, other protections may be appropriate. Developers would be well advised to consider protections such as advance payment bonds, increased rights of inspection of the materials off-site, ownership clauses (where it is made clear that the modules in the factory belong to the employer and have been marked as such) and the use of vesting certificates - all of which we are seeing on a number of MMC projects. These approaches have been used on renewable energy projects in the past, so are not unheard of in the sector.

The extra logistical aspects of MMC should also be considered when agreeing contracts. If a module is delivered to the site and arrives damaged, it may have to be returned to the factory. The mechanism for this, the impact on the programme, and the risk to the developer depending on what payments had been made, all need to be considered.

Insolvency risk

The construction sector experienced a higher level of insolvencies than any other sector in England and Wales in 2021 (2,579 cases which represents 19% of all cases). This is a trend which is, unfortunately, expected to continue in 2022. And as the effects of COVID-19 continue to be felt and the prices of materials and energy continue to rise, MMC supplier insolvency is no less of a risk than insolvencies in the rest of the construction sector. The difference however is that MMC is newer, with perhaps more scope to negotiate contractual provisions - potentially providing an opportunity to use the lessons learned from construction sector insolvencies in recent years. As such, developers may to some degree be able to actively manage and, in doing so, hopefully navigate these risks.

One example is intellectual property. MMC suppliers use their own designs, which may be protected by copyright, so if the supplier becomes insolvent, without appropriate copyright provisions, it is unlikely that another company could complete the build (assuming that the MMC supplier will not continue to trade under the control of a duly appointed insolvency practitioner). At the contracting stage due consideration should, therefore, be given as to where key intellectual property rights sit and how those rights might be capable of being used to enable another supplier to be brought in to complete the project if necessary.

Longer term, what should the considerations be for a scaled-up version of MMC in relation to risk and ownership?

Standardisation would offer greater protection for the sector. With so few working at scale with MMC, developers and contractors are at considerable risk if one of their MMC suppliers, for one reason or another, can no longer deliver their contribution to the project. If parts and processes are standardised, it would be much easier for an alternative supplier to step into the project and it will help to build confidence in the industry, including for mortgage lenders and insurers.

The government-funded Construction Innovation Hub is looking at implementing manufacturing processes and systems which will enable interoperable tools and parts. This will allow construction companies to use different products from different manufacturers and factories and, in turn, reduce risks.

The issue of transfer of ownership of goods is another area which requires a modern shake-up under the lens of scalability. To facilitate cashflow on MMC projects, we have seen developers pay for materials that are offsite, receive a vesting certificate along with being granted access rights to see and take photos of the materials and, in the worst-case scenario, they have the right to seize materials should the manufacturer fold before the completion of a project.

This works in theory, but in practice the process of seizing materials is notoriously challenging – for example, you may have a vesting certificate, but do you have the right under your contract to go to the supplier's site without trespassing? If the supplier's compound is locked, then how do you retrieve the goods? And even if you can retrieve them, specialist equipment may be needed to move them. As such the question of ownership needs to be addressed differently if MMC is to work at scale.

More generally, architects and design professionals all have a role to play too - in fully understanding the ever-growing MMC technologies; understanding the processes, logistics and challenges involved in delivering MMC projects; and advising their clients on whether MMC is suitable for their projects and where the risks are.

Our five top tips around ownership and risk in 3D volumetric and modular MMC projects

1. Understand the MMC elements of your project – including how it will work in practice and where the risks are.
2. Be clear on when ownership passes – make sure you agree protections as necessary (to the extent commercially possible), know where the remaining risks are and monitor them. Understand what you own. Ensure contract terms are complied with, particularly around marking goods and receiving all relevant certificates.
3. Have an action plan for insolvency – think in advance about what you are going to do in the event of MMC supplier insolvency (understanding where modular parts are stored and when ownership passes with vesting certificates on hand), so you are ready to take quick action if needed.
4. Where your project is made up of MMC and non-MMC elements, consider the contract terms carefully – it may be you need to split parts of the contract to have MMC and non-MMC terms for different parts of the works.
5. Collaborate – have open conversations with your contractor and consultant team so you are on top of progress and risks.

There are many significant benefits to MMC, so while it is important to be aware of the particular ownership and risk aspects involved in using MMC in projects, these can be addressed and mitigated with forethought, commerciality and appropriate contract terms.