Prefabrication of modular units in construction projects refers to off site manufacturing of building modules (e.g. bedroom units, bathroom units) which are then assembled and installed on site. This method is casually described as “LEGO” method of construction where various building parts are installed on site as opposed to the traditional in situ construction where works are predominantly carried out on site from scratch. In Singapore, this off site manufacturing and on site assembly method is widely known as ‘prefabricated prefinished volumetric construction’ or PPVC. Whilst the benefits of PPVC are widely written in various literature of construction such as higher productivity and consistency in quality, this article examines PPVC from contractual and commercial perspectives of a contractor. Given the breadth of issues that this subject entails, this article is part 1 of a two-part series. In essence, these articles provide insights into how should a contractor evaluate the risk profile of a PPVC project if it decides to participate as a tenderer. What are the tender clarifications or qualifications that should be included or negotiated in order to protect its financial interest? 

One of the greatest distinction between PPVC project and other conventional project pertains to method of construction. By contrast the completed buildings under a PPVC methodology do not exhibit differentiating visual characteristics revealing its method of construction apart from minor detailing in construction joints. Notwithstanding that, the design development process of PPVC project undertaken by architect and engineering consultants has to accommodate and consider the practical aspects of the fabrication process. Much of the modular units are likely to be identical in design and be standardised in order to achieve the desired productivity level through repetition in fabrication. In this regard, part 3.1.2 of the Design for Manufacturing and Assembly (DfMA) which is a PPVC industry guide led by the Building And Construction Authority (BCA) of Singapore highlighted the need for early design coordination involving fabricators, builders and contractors. Where contractors are required to provide its construction and fabrication input during tender to facilitate design development, to what extent is the contractor deemed to have assumed design responsibility? To the extent that the main contractor and PPVC fabricator are separate and distinct entities, how should the design responsibilities, if any be structured and distributed in the contracting process? Additionally, if much of the fabrication and manufacturing works are performed off site, how do this arrangement affect progress payments and contractor’s cashflow? As significant amount of fabrication details have to be ironed out at the inception of the project, this may require a fast track subcontracting procurement process to ensure a holistic and inter-disciplinary coordination in both design and manufacturing. Traditionally, various nominated and domestic subcontractors are only engaged sometime after the award of main contract works. This may not be feasible if subcontractors’ input are required in advance in respect of fabrication and connections details. 

All the above issues are practical considerations that should be at the forefront of the mind of any commercial director driving the procurement strategy of a contracting firm. Ultimately, the decision on whether to adopt the PPVC method is made by the Employer or property developer which in part is also influenced by regulatory requirements. Whilst the contractor has a limited say on whether to adopt a PPVC approach for any given project, it is incumbent upon the contractor to address any contractual ramifications of any consequential PPVC approach. In doing so the contractor has to consider issues from the view point of a manufacturer or fabricator.

Design And Build / Design Development And Build

As mentioned earlier, the Design for Manufacturing and Assembly (DfMA) is a PPVC industry guide that contractors can refer to for all relevant subjects including procurement models. Under part 2.1 of this guide, it is proposed both Design and Build (D&B) or Design Development and Build (DDB) can be adopted for PPVC projects given the need to incorporate construction and fabrication details in the design development process. Early involvement of contractors and fabricators is almost inevitable to ensure that the design intent does not only include aesthetic consideration but also incorporate practical fabrication and on site installation details. So what are the specific design details that are required from fabricators and contractors for PPVC projects? A general understanding of these design and fabrication input may shed light on the extent to which design responsibility may be delegated from the design and engineering consultants to the contractor and fabricators. 

Whilst PPVC modular units are never intended to replace the functions of load bearing structural elements of a building e.g. beams, columns, slabs etc, these modular units have direct impact on structural integrity of the building as a whole. If any PPVC module experience an isolated or localised load stress, it has to be able to effectively transmit such load evenly and uniformly to the structural system to maintain its integrity and robustness. This in turn is dependent on the way in which the inter-module connections are designed including interfacing details. The overall idea is to avoid the collapse of one module to cause a domino effect on the adjacent modules resulting in complete structural failure. In other words, the design inputs from the contractors and fabricators are not merely pertaining to how the works are to be constructed but also maintaining the structural performance of the building. If the structural performance of the building is compromised, the fabrication and design details of the PPVC modules could be one of the points of causation. Apart from structural concerns, there are also other architectural design performance implications in respect of PPVC fabrication. For any given architectural floor layout, the extent of modularisation of PPVC will need to be undertaken to determine the types of modules, the number of modules and the percentage of total super-structural floor area for compliance with regulatory requirements. These efforts in turn will affect the economics of the development cost since the dimensions of modular units will establish the weight of the PPVC modules and its ability to be transported with certain freight trucks over a projected number of trips. Thereafter, the moulds required to be fabricated to facilitate the production of defined modular units will be determined as well. Within the modular units, other architectural details will be ironed such as water tightness between modules and positioning of shaft or openings where services are required to traverse through multiple modular units. Any architectural design that does not adequately consider the practical details in modularisation can have potential ripple effect on project including alignment of openings for services that runs through multiple modular units, inter-modular unit connections that in turn affects water tightness, sound insulations and fire compartmentalisation etc. Likewise the choice of architectural materials and finishes affects the weight of modular units which consequently implicates the transportation cost and construction timeline. Therefore the traditional delineation of design responsibility and workmanship responsibility is blurred because the feasibility of fabrication could end up driving the design development decision making process.

The common procurement route for PPVC project is therefore either D&B or DDB where the contractor holds design responsibilities in addition to its  usual workmanship responsibilities. Under D&B, the contractor provides a full design proposal based on a design brief that encapsulates the Employer’s requirements. In this regard, the entire spectrum of design process i.e. from initial concept design to detail design are produced by the contractor and submitted to the Employer for its evaluation and subsequent acceptance. On the other hand, DDB option involves a procurement route where the contractor develops detail design based on an initial concept design produced by the Employer through its architectural consultant. In this DDB approach, the contractor is usually required to also provide its full structural engineering as well as mechanical, electrical and plumbing (MEP) engineering design to support the requirements included in the initial concept design. 

Given the distinction between D&B and DDB, when participating in any tender for PPVC project, one ought to be satisfied that the choice of contract form matches the corresponding design responsibilities. Taking public sector procurement as an example, the PSSCOC for Construction Works and PSSCOC for Design & Build are typically used as the contract forms of choice. The former is meant for traditional design-bid-build whereas the latter is drafted for D&B. Although both contract forms have provisions dealing with design from the contractor under their respective Clause 6, the PSSCOC D&B evidently sets out a more extensive and onerous design responsibility. Under PSSCOC D&B, the contractor not merely has to be responsible for its design but also has to satisfy itself that any inadequacy, impracticability, insufficiency or unsuitability of the Employer’s requirements (and arguably its own concept design) has been addressed by the contractor’s design proposal. Therefore it is of paramount importance for the contractor to understand whether there is any residual design responsibility on the part of the Employer’s architectural consultant in the production of the initial concept design. If yes, how can particular conditions be introduced to make certain that such delineation is described appropriately. If the contractor is required to address and rectify any design deficiency included in the Employer’s requirement, it may result in fabrication details superseding concept design where necessary.

Payment For Material Off Site And Associated Risks

Under most conventional construction projects, there is a general reluctance on the part of the Employer to make payments for construction materials or goods that are off site for various reasons that will be elaborated later in this article. Therefore traditionally, payments are only made to the contractor either for materials that are already delivered to site or those that has been incorporated into the permanent construction works. Where payments are made for materials off site by exception, there are contractual safeguards in place to protect the Employer’s interest. As bulk of PPVC projects are fabricated, manufactured and assembled off site, payments for these modular units are almost inevitable for project cashflow purposes. However when the characteristics of PPVC projects are examined closer, some of these conventional concerns for off site payments are not quite applicable given the unique features of PPVC modular units.

So what are the reasons for generally not paying for construction materials off site? Firstly it is challenging to ensure that the ownership for off site materials that are paid by the Employer is transferred from the contractor to the Employer. By contrast, materials that are delivered to site or already incorporated into the permanent works do not have the same ownership concerns since these are by definition within the physical possession of the Employer. If the contractor goes into liquidation, there is a real concern that the paid off site materials may not be properly accounted and could end up being sold as part of the liquidation process. Alternatively, if the contractor had not made payment to its downstream supplier for the off site material concerned, there may be retention of title provisions in the supply contract where the ownership of the said material is not passed to the contractor until payment is made. Therefore the title of ownership to these materials could not be passed to the Employer by the contractor if the contractor do not have the relevant titles in the first place. It should also be noted that off site materials which are generic by nature e.g. cement, reinforcement bars, floor and wall finishes, are relatively liquid assets with considerable secondary market value that can be sold to other interested buyers. 

Secondly, it is challenging to distinguish a bag of cement assigned to Project A from another identical bag of cement assigned to Project B. Therefore, even if the ownership is passed to the Employer, it is physically challenging to identify materials that are paid and meant for the Employer as compared to other identical goods within the same storage area. Although some may proposed the use of vesting certificate to indicate the ownership for goods concerned, such measure may not be adequate if the storage of such materials are not secured. Given the collective reasons above, payment for materials off site is inherently risky and the enforcement mechanism is not entirely reliable. Notwithstanding that under the PSSCOC, Option Module B is available in case parties are inclined to have payments made for materials not delivered to site. However, it should be noted that even if such option is adopted, the amount certified for payment is subject to the discretion of the Superintending Officer. 

As mentioned earlier, the hesitations for off site materials payment may not be applicable for PPVC modular units because unlike general construction materials, PPVC modular units are highly bespoke for its intended project. It is almost impossible for a bespoke modular unit to be mistaken for other projects given the specific dimensions, choice of architectural finishes and the overall structural fit to its intended building system. Therefore, there is very limited secondary market value for such specific and bespoke modular units making it significantly less vulnerable to be subject to liquidation proceedings without the Employer’s knowledge. It should also be noted that most PPVC modules are heavy with weight of ranging from 25 to 40 ton and can only be handled with high capacity cranes that are limited in the market. The risk of it being misplaced from fabrication site is therefore reduced significantly. Given the observations above, it is incumbent upon the contractor to draw the distinctions of material off site payment risks during tender negotiation in order to secure the most favourable payment terms. Very often the presence of certain Option Modules or template agreements may shape the general understanding of certain concepts. These general templates are after all ‘general’ and may not be applicable under all circumstances.

Although the risks of ownership transfer and disposal of materials due to liquidation proceedings are considerably lower for PPVC units as compared to generic construction materials, there are still issues to be considered when negotiating payment terms. There ought to be a reasonable mechanism to ensure that payments commensurate with progress of work done. Based on a PPVC Information Kit (Revision 1.0 dated November 2019) published by the Building And Construction Authority, there are recommended payment arrangements that can be found in its part 4.2. Traditionally, quantum of payments are dependent on actual work done on site. However, when works are done off site which are executed under a fabrication and manufacturing model, the contractor may be in a better position to manage the speed of production. This is because the works are not affected by elements outside the contractor’s control such as inclement weather. Further, since the detail design are in the contractor’s realm of control due to either the D&B or DDB procurement pathway, contractor could expedite the progress of works considerably without waiting for issuance of construction drawings, consultants’ response to request for information etc. However, it may be vague to define what constitute percentage completion, say 50% of work done. In view of the above, the PPVC Information Kit proposes a milestone payment arrangement. Under this payment method, 30% shall be paid for completion of PPVC shell offsite, further 30% for completion of PPVC finishes offsite and final 40% payment upon on site installation of PPVC units. These percentages are with reference to quantum of PPVC cost included in the contract sum. 

Advance Payment Bond

Apart from ensuring a fair payment term for work done off site to facilitate project cashflow, it is equally important to secure an initial downpayment or advance payment where necessary. It is not uncommon for the Employer to accede to request for advance payment if it is credibly established that the contractor is expected to expend a significant capital outlay which is common for PPVC projects. The Employer would usually require an advance payment bond as a form of financial guarantee in return for such advance payment. Under the contract form of PSSCOC for construction works, the Option Module D is available for parties undertaking PPVC project with agreement for an advance payment. In short it provides a contractual mechanism governing the Employer’s right to call on the advance payment bond, the progressive clawing back of advance payment and also setting out the requirements to be fulfilled by the contractor prior to receiving its advance payment. 

How should a contractor assess the commercial viability of the proposed Option Module D? In essence, the benefit of such arrangement should outweigh the risks and costs associated with the provision of the stipulated bond. Based on part 4.2 of the PPVC Information Kit mentioned earlier, the common practice under public sector project is for advance payment amounting to 20% of the total PPVC cost subject to a maximum of 10% of the entire contract sum. The contractor ought to compare the interest cost of such amount based on say an overdraft facility or credit line with a bank relative to the cost of provision of an unconditional demand bond. As the banking relationship and financial credibility of every contractor with its bank differs, such comparison is fairly specific to the firm’s unique credit circumstances. Occasionally, banks may require its clients to place a fixed deposit for the sum stipulated in the unconditional bond as a form of collateral. In such a case, the risk and cost associated with securing an advance payment may outweigh its benefit. This is because the advance amount will be progressively clawed back based on an agreed series of tranches within a defined duration. In other words, the advance amount diminishes over such defined duration but the contractor’s cash collateral equivalent to the advance amount remain ‘frozen’ with its bank throughout the validity period of the bond. Under Option Module D, the bond shall remain valid for three months after the full recovery of advance payment amount. If the contractor has the relevant funds to fully cushion such arrangement, it may be better of utilising such funds for its working capital rather than requesting for an advance payment. Alternatively the contractor could negotiate for a more favourable claw back arrangement where it is done over an extended period of time which result in a smaller monthly recovery sum. If such arrangement could not be agreed, the contractor may also consider procuring an insurance bond in lieu of banker’s guarantee for the same financial guarantee. This is an acceptable alternative under Option Module D. Under the insurance bond, the contractor is required to pay an insurance premium that corresponds with its risk of default rather than having to put up a significant cash collateral with a bank.

Conclusion

In part 2 of this PPVC related article series, we will be examining other contractual issues from the contractor’s perspective such as subcontract procurement risk allocation, components of contract documents and construction programme. It is quite evident that PPVC projects require contractor to assess conventional contractual issues from a different lense. Traditionally, one formulates its position on various contractual issues based on case precedents and relevant commentary and legal literature. However there is still a limited number of PPVC related disputes at least available in the public domain. Until PPVC methodology progressively becomes main stream construction method, contractors should exercise vigilance and judgment from first principle i.e. back to basics. It also helps to have a healthy dose of skepticism on the use standard agreement templates. Most of these conventional templates are legacy of traditional construction method that may be commercially incongruent with the nuances of PPVC construction approach.




Koon Tak Hong Consulting Private Limited