Written evidence submitted by Savills [MMC 024]

Modern Methods of Construction has the potential to revolutionise the housebuilding industry

The country faces a significant undersupply of housing, which the Government has recognised in setting the annual housingbuilding target of 300,000 homes per annum. However, the construction sector is facing capacity challenges that make achieving this target a challenge. The adoption of Modern Methods of Construction (MMC), has potential to mitigate these capacity challenges and support dramatic increase in output of housebuilding industry.

What are the benefits of MMC, and how can they sustainably boost the housing supply?

The use of MMC to deliver housing provides a range of quality, economic, environmental and welfare benefits. Many of these combine to increase the efficiency of the sector and will allow, if fully embraced, an increase in the rate and quantum of delivery of housing. Furthermore, MMC addresses one of the key challenges facing the house building sector – a shortage of skilled workforce.

Build Quality

Over recent years there have been continual issues with the build quality of new build housing across England. A Consumer Satisfaction Survey carried out by the Home Builders Federation and the NHBC in 2017 found that 98% of new home buyers reported problems with snagging or defects to their home, with a quarter reporting over 16 separate issues[1]. The use of MMC and the construction of components, assemblies and/or fully fitted modules in a controlled factory environment allows the significant improvements in quality control. It is possible to undertake quality control checks through each stage of the build process to ensure that no part is allowed to progress to the next stage until it has been signed off. This will make it possible to mitigate and prevent a large proportion of the snagging issues and defects that are inherent in traditional onsite construction.

Construction Speed

For some sectors of the residential market, such as Registered Providers and Build to Rent developers, the potential for increased construction speed offered by MMC is a benefit. Depending on the type of MMC system being used it is possible to significantly increase the speed of delivery in comparison with traditional construction. It would be normal to expect to save 40% as a target for volumetric and could be 25-30% with a basic panelised system. The total saving in time is dependent on the form of MMC and the nature of the cladding and roofs. The closer the building is to completion in the factory the greater the savings. Volumetric buildings can be up to 95% complete when arriving on site, whereas a Cross Laminated Timber/open panel system may be only 25-30% of the building.

However, to achieve the time savings the MMC system needs to be designed (and the scheme fixed) and ordered very early on the programme. This can be problematic, with late changes impacting the cost and delivery programme. If this is resisted or not achievable for whatever reason you will not get the time benefits.

Improved Sustainability and Waste Reduction

In terms of environmental sustainability, MMC has the potential to reduce the number of road traffic movements to a construction site and therefore improve the level of emissions generated in the local area and disruption to local residents. A study by Quale[2] in 2011 compared the total CO2 emissions associated with onsite and offsite manufacturing. The report found that in terms of metric tons of CO2 associated with transport alone there is a potential for a net saving of 20% from offsite manufacturing compared with onsite construction.

MMC also offer improvements in terms of material waste. A Buildoffsite report[3] finds that on traditional construction projects, waste can represent up to 20% of the raw material tonnages with an average across the construction industry of c10%, compared with only 1%-3% in manufacturing. This is possible due to two reasons. Firstly, designing for manufacture ensures that the ordering and cutting materials to size in factory is more controlled and efficient, thereby reducing wastage. And secondly, through better collection, sorting and recycling of waste meaning less material is disposed of.

Cost Certainty

MMC also offers a greater degree of cost certainty on development; due to early fix of design and thorough planning of the production. It is also less likely to encounter construction overruns due to weather etc. delaying work on site compared with traditional onsite construction – for example the NHBC reported a reduction in construction starts in Q1 2018 and stated that the ‘Beast from the East’ resulted in c1 month of lost construction time[4].

Labour Improvements and Safety

Depending on the system, MMC can dramatically reduce labour input both onsite and offsite; a report by Buildoffsite[5] found that the total reduction in site hours worked could be as much as 60-80% depending on the construction system. The need for fewer workers to manufacture, deliver and install components or assemblies means that MMC offers a partial solution to the shortage of skilled labour currently facing the construction industry.

Furthermore, moving construction into a factory environment could dramatically improve the health and safety of construction workers. By building in a controlled environment the risks of working at height, exposure to noise and dust can be reduced or eliminated. At the same time it is possible to identify and mitigate against other hazards of construction. A study of HSE data by Buildoffsite found that, in comparison with construction, accident rates in manufacturing are 29% lower for major injuries and 52% lower for fatalities[6].

The combination of improved working environment and better health and safety has the potential to improve the public conception of construction and help it attract a younger more diverse workforce.

What are the primary risks to increasing the use of MMC?

While MMC has a number of benefits, as outlined above, it does introduce some new risks to the housebuilding.

Manufacturer Insolvency Risk

Using MMC rather than traditional construction introduces new risks around advance payment and potential insolvency of manufactures. Many MMC manufacturers are typically small to medium sized privately owned businesses and cash flow is a key issue for them, which is why they require long term demand to under pin their business models.

The nature of MMC means that suppliers are likely to require increased use of upfront payment prior to the fabrication of any components, modules or assemblies. This is introduces heightened risks associated with potential insolvency of the manufacturer prior to completion of the project, which could result in the loss of any money paid up front, as well as costs or losses associated with recovering any components or assemblies yet to be delivered to site.

Furthermore, the majority of MMC methods utilise proprietary and non-standard techniques for manufacture and assembly. The use of these heightens the risk to a project if the manufacturer becomes insolvent. Unlike traditional construction, where it is possible to replace an insolvent sub-contractor with a new one to continue the work, with MMC there may not be anyone else able to continue or finish the manufacturing of components if the main manufacturer becomes insolvent.

Longevity and Lifecycle Costs

The creation of BOPAS (Build Offsite Property Assurance Scheme) and work by NHBC have alleviated some of the risk around MMC construction methods and provide quality assurances on construction methods and processes. However, the nascent state of the MMC market and the lack of historic data on the performance, quality and longevity of different construction methods presents a risk. This is especially acute for Registered Providers and Build to Rent operators who will be holding completed stock for the long term and need to be able to produce 30+ year cost assumptions to correctly value their stock. This has an impact on the Housing Associations viability assessments and manufacturers do not fully understand this.

How could the Government, Homes England and local authorities (a) increase demand for MMC to meet its homebuilding targets and (b) support the construction industry in increasing the use of MMC?

In order to fully capture the benefits of MMC, including making it competitive on cost to traditional construction, requires volume and continuity of demand. However, this has yet to fully materialize in the residential sector and is unlikely to do so in the short term. This is due to the risk averse nature of construction and the significant upfront costs and commitments required to do this.

This means that there is a case for Government intervention to stimulate the demand for MMC. There are positive steps already being taken to support the market, with Homes England funding MMC pilot projects. But more could be done. Homes England should continue to require a proportion of homes using its funds to be built using MMC,  but ensure there is suitable flexibility around the method used and avoid being too prescriptive over the use of any single system.

The Greater London Authority has commissioned work to look at a common design code for offsite manufactured homes. The Government should continue this work to draw up a Design Code that drives a more standardised approach to MMC across the country; similar to work undertaken in Australia, which has published the Handbook for the design of Modular Structures[7]. This would serve a dual purpose of improving confidence of manufacturers, investors and housebuilders or developers. And at the same time set out key parameters and standards that should be used across different systems to increase compatibility and repeatability while still allowing for customisation and varied design.

How can small and medium sized housebuilders better utilise MMC, including support innovation and competition in the construction industry?

A significant barrier for small and medium sized housebuilders utilising MMC is the requirement for scale in demand to fully benefit from the speed and cost efficiencies. Therefore, there needs to be a platform that pools demand from multiple small and medium housebuilders – the same is true for many housing associations and local authorities that are looking to utilise MMC for their construction programmes. By creating a larger pool of demand it will increase the buying power of small and medium housebuilders, allowing them to offer the scale of demand manufacturers require and stimulate competition in the MMC sector. Furthermore, the pooling of demand from multiple sources could initiate the need for standardisation of different MMC elements, such as connections and mountings. This would help to mitigate some of the insolvency risk currently inherent in the MMC sector.

How can challenges related to access to finance (for both homebuyers and developers) be overcome?

MMC warranties from the NHBC and other insurers, and accreditation by BOPAS have been substantially reviewed and extended. In common with traditional building techniques, the NHBC is now simply concerned with whether an MMC home is ‘safe and secure’. Also, BOPAS is exploring whether its 60-year MMC accreditation should be extended to 75-100 years. These are important steps forward in providing lenders, investors, valuers and insurers peace of mind over MMC.

January 2019