Procuring modular housing: Is MMC becoming mainstream?
1. Introduction
Modular methods of construction (MMC) offer a more efficient, more sustainable and rapid means of project delivery. Their signature characteristic is the manufacturing offsite of building components for assembly on-site. The considerable potential of modular housing solutions has been highlighted consistently. Frequently, modular construction is cited as a means of the Government achieving its ambitious target of delivering 300,000 housing units a year.
Currently, the take-up of modular housing in the UK has been disappointing. Modular homes account for only 15,000 of the 200,000 units built each year. That contrasts sharply with the adoption rates in jurisdictions such as Germany, Sweden and Japan, where modular housing is an important and well-established part of housing policy.
It is likely that public procurement in the UK has been contributing to the blockage of modular housing as the construction method of choice in public procurement contests. The procurement rules should foster competition which in turn should promote innovative and efficient solutions. As set out below, procurement has tended to make modular solutions too difficult to deliver or pitted them unfairly against tried and tested modes of construction.
There is good news though. Notwithstanding the difficulties of the previous 12 months, there are clear signs from procurement practice that this is changing and that modular is at last moving into the mainstream. There are also examples of innovative thinking and solutions designed to force MMC into the front of mind of public bodies.
This article charts some of the difficulties for public which may have been posed by modular. It also sets out the growing evidence of a turning tide, as key public actors take significant steps towards the adoption of modular housing solutions.
2. Inherent difficulties in procurement: classification
It is possible that public bodies until now have struggled to determine whether a contract for the development of modular housing would constitute either a supply or a works contract for the purposes of the public procurement rules.
If the subject matter relates to the purchase of components, the project may need to be put out to tender as a supply contract. On the other hand, if the supplier is expected to install the modular components as units, the procurement may need to be carried out as one for works. Often the contract will contain elements of both, requiring the authority to decide whether they are buying supplies or works. This is not an insurmountable difficulty and can be overcome by an analysis of the relative value of the different pockets. In reality, the classification of the contract as either one for supplies or works is unlikely to spark a legal challenge. However, this may have added to the headaches of those seeking to devise procurement strategies for this type of construction.
3. Inherent difficulties in procurement: Specifications
Legally, when drafting specifications for their preferred solution, the contracting authority should not draft too narrowly or widely in order to rule out or unduly favour any potential workable solutions which may meet its particular needs. Not knowing how to draft specifications for a new type of solution – or to draft them wide enough so as not to inadvertently discriminate against that new type of solution – may have been a barrier against the adoption of modular in public procurement.
Drafting of specifications is a difficult exercise and it is possible that authorities simply found it too difficult to do this for a new type of solution, particularly against the backdrop of a possible allegation of being unduly discriminatory to more traditional solutions. The Construction Innovation Hub identified “defining the need” as one of the biggest obstacles to the growth of modular solutions, noting that there had been confusing imprecision and inconsistency in the way specifications and standards had been drafted. There is, as set out in Section 6 below, evidence that this is changing. Central Purchasing Bodies setting up frameworks and dynamic purchasing systems which other public bodies can opt into effectively provides them with a ready-made solution.
4. Inherent difficulties in procurement: Evaluating cost
Modular solutions sometimes also suffer as a result of making cost the primary focus of the procurement. The up-front costs of modular solutions are significantly higher as developers must foot the bill for sizeable manufacturing costs. The overall costs may work out on average around 12% more expensive overall, according to one source.
However, there are countervailing efficiencies which modular brings. One relates to time: a modular home can be built in as little as three days whereas a traditional build may take up to 32 weeks to deliver. Modular construction also reduces labour costs, as component manufacturing is largely a mechanised process, requiring fewer operatives to oversee it than on-site construction.
Depending on how the cost evaluation is carried out, modular solutions may find themselves at a disadvantage at the evaluation stage. For example, if the cost evaluation mechanism in the tender focuses purely on cost, modular solutions may lose the opportunity to be credited with the savings that can be made over the entire life-cycle. On a pure project cost basis, modular is likely to compare less favourably than traditional solutions. That fact may disincentivise providers capable of delivering either traditional or modular units from specifying the latter.
The playing field is likely to be more level where the procuring authority structures the cost evaluation to take into account the whole life cycle costs rather than focusing disproportionately on the upfront and short term costs. In a Report entitled “Modern Methods of Construction” published by the House of Commons’ Housing, Communities and Local Government Committee in 2019, the Committee outlined how it had heard evidence that the MMC homes were usually more efficient than those traditionally built. For this reason, The Royal Institute of British Architects said that if the whole-life value of residential units were taken into account at the procurement stage, it would increase the demand for MMC homes. The Report recommended that local authorities liaise with social landlords who had adopted MMC homes to learn more about their potential and also that authorities should “factor in whole-life running costs of social homes when tendering for building contracts”.
Similarly, in 2018, Mott MacDonald told a Committee of the House of Lords that “procurement needs to move from a traditional, transactional, risk-averse approach to recognise that value (not price) is all important”. A similar point was made by Mace, who said “[a] scorecard that tracks elements such as spend with [small and medium-sized enterprises], payment practices, productivity and use of [modern methods of construction]” can be used to drive the right behaviour and practices that will promote productivity improvements.
Whole life costing is permitted under the Public Contracts Regulations 2015 as a means of carrying out the financial appraisal of tenders. Procurers can be educated as to the longer term cost savings which modular can offer. After all, competitive tender exercises should not identify the cheapest option but that which is the most economically advantageous. Through engagement, public bodies might be persuaded to include award criteria which reward some of the benefits that modular housing has to offer, such as shorter lead in time and more sustainable solutions.
The all too clear dangers of prioritising the lowest cost solution were highlighted by the tragedy of Grenfell Tower. The ensuing public inquiry have highlighted the risks of pursuing the cheapest option at the expense of other quality, safety or performance factors. When choosing a contracting partner to deliver refurbishment to Grenfell in 2014, the Kensington and Chelsea Tenants Management Organisation tried to cut £800,000 from projected project costs. They accepted a proposal from the preferred bidder to save £293,368 from switching from the originally specified zinc cladding to plastic-filled aluminium panels which had “significantly worse” fire performance.
Public bodies can also be encouraged to give a greater weighting in their evaluation criteria to some of the known benefits which modular can deliver. These can include, for example, including a significant proportion of the overall criteria being linked to sustainability criteria and delivery time. The weighting for cost could be reduced in favour of these other non-price considerations which are arguably of equal or greater importance anyway.
5. Procuring MMC: is modular becoming mainstream?
Recent procurement and policy activity has clearly highlighted a potential change. Firstly, an impetus for further adoption of offsite construction was provided by the Government’s Construction Playbook, published in December 2020. The Playbook supports best practice in construction, underpinned by three key principles: build back better, greener and faster. The Playbook encourages public bodies to set targets for the adoption of modular construction and requires them to consider the social value that modular can bring, including the drive to net zero. Public bodies are expected to comply with the directions of the Playbook on a “comply or explain” basis.
In April 2021, Homes England opened a further competitive bid round under the Affordable Homes Program, which will lead to a fresh intake of strategic partnerships. At the time of writing, this initiative remains open for applications. Homes England is seeking strategic partners to deliver affordable housing at scale; organisations interested in applying now have until noon, 18 May 2021 to submit their proposal online.
Strategic partners need to demonstrate how they are supporting Homes England’s strategic objectives within their development programme. This includes the adoption of modern methods of construction (MMC), a dedication to high-quality sustainable design and a commitment to working closely with SMEs.
Strategic partnerships are one of two routes to access grant funding from Homes England through the Government’s Affordable Homes Programme (2021-2026). Rather than access funding on a scheme-by-scheme basis (via Continuous Market Engagement), strategic partners enter into a multi-year grant agreement with Homes England to deliver affordable housing. While strategic partnerships have historically only been available to not-for-profit providers, this time Homes England is welcoming proposals from for-profit affordable housing providers and developers, and local authorities. The benefit of a Homes England grant will assist developers in meeting some of the cost obstacles mentioned elsewhere associated with upfront investment required in the manufacturing process.
This is far from being the only initiative in support of MMC. On 7 April 2021, two local authorities in Sussex announced they were jointly procuring a four-year modular housing framework worth £110m. Lewes District Council (LDC) took the lead on behalf of Eastbourne Borough Council (EBC) in relation to a collaboration on housing development programmes, primarily in relation to affordable homes. The estimated value of LDC’s portion of the framework is £41.25m, for EBC it is £35.25m and for other contracted authorities it is £33.5m. Only one lot is available.
A number of Dynamic Purchasing Systems (“DPSs”) have also recently been established with the aim of providing contracting authorities with a direct route to market. These DPSs have been procured by “Central Purchasing Bodies” (“CPBs”), which are public bodies carrying out purchases on behalf of one or more contracting authorities. One of the exciting aspects of a DPS as opposed to a framework is that a DPS allows qualifying contractors to join at any point during its lifetime. Given modular’s status as a fast moving market, it is perhaps a smarter procurement choice and one more compatible with the goal of delivering innovation. Relative to qualification to a framework, a DPS is a simpler system for an SME to join.
One of the DPC was launched, in November 2020 by EN:Procure, a CPB which has expressly specified MMC as a requirement for admission into the system. EN:Procure has said this was developed in response to members’ MMC aspirations and to help them achieve Homes England targets for funding. It also says the new DPS is fully flexible and able to respond to changes in systems and market maturity. There are three Lots, two of which have been awarded: Lot 1 (Panelised System Homes), Lot 2 (Volumetric System Homes) and Lot 3 (Turnkey Modular Homes). The lotting structure allows suppliers from Lots 1 and 2 to be integrated into a more traditional form of contract with a principal contractor, whilst Lot 3 provides for supplier and contractors to partner and offer a turnkey service to members.
In March 2021, Constructing Modern Methods (CMM) and the South West Procurement Alliance (SWPA) announced the creation of a database that could allow local authorities to analyse the marketplace and define their requirements before procuring against a dynamic purchasing system (DPS). One of the key aims of the program is to deliver offsite, low-carbon housing. The initiative has been developed in partnership with YTKO, the Bristol Housing Festival, Bristol City Council and nine modular housing providers – and backed by Innovate UK.
6. What can be done to encourage further take-up of modular?
There are clearly encouraging signs for modular housing, suggesting a rising level of popularity among procuring entities. However, some providers of modular solution may remain frustrated that certain local authorities are reluctant to take advantage of the benefits it brings and that opportunities remain few and far between. While the frameworks and dynamic purchasing systems that have been set up are helpful, there is no guarantee that authorities will wish to buy into them.
To the extent there is still resistance to specify modular, suppliers may need to engage with local authorities, housing authorities and other public bodies in order to sell the clear benefits. An excellent way to do this is through participation in market engagement exercises. Regulation 40 of the Public Contracts Regulations 2015 allows public bodies to engage in consultation with suppliers and other stakeholders in order to assist it in defining its specifications for the tender exercise. Market engagement exercises are frequently advertised to invite interest from consultees.
Ideally, suppliers will want to convince the procurer to specify modular solutions or at least to draft specifications widely enough so as not to exclude modular solutions. The Construction Playbook and other examples cited above will strengthen their case. Modular procurement having been undertaken by a number of authorities already, some useful precedents are available (for example, a number of offsite procurement specifications have been published online). Suppliers may also wish to emphasise some of the social and environmental benefits of modular, which ought to be of interest to any public body. They could alert individual authorities to the growing number of frameworks and DPSs which may be available to them and which would also reduce procurement time and cost.
Another way to "break the ice" with public bodies may be to engage in small-scale pilot schemes with them, possibly constructing a small number of modular units. If the pilot goes well, they may get a taste of the benefits of modular, possibly whetting their appetite for its deployment larger projects. The pilot may need to be seen as a loss leader by the supplier. Seeing the "long game", the pilot may be a means of demonstrating relevant experience for the purpose of satisfying shortlisting requirements in competitive procurement exercises as well as winning the trust of public bodies, both with regard to working with the supplier and in specifying modular construction.
For more information, please contact Paul Henty or your usual Charles Russell Speechlys contact.
