Industrialised construction ‘technological revolution’ not without risk (PINSENT MASONS)

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As with all technological revolutions, the shift towards an industrialised construction industry is not without its risks.

The way in which major infrastructure projects are procured will inevitably be adapted to accommodate modern methods of construction across the value chain. At the same time, the ecosystem of businesses offering the technology to deliver the necessary changes requires further maturity.

Areas of risk

Customisation

Clients and the ultimate owners of major projects often want a unique product that shows off high design aesthetics and requires a significant amount of customisation. Contractors may need to modify their standard industrialised scope if a high degree of customisation is required, which can have time, cost and quality implications.

Delay

Site work and building components in the factory occur simultaneously under industrialised construction. This means that delay of either site work or factory work will inevitably impact the other.

If site work is delayed and the components are ready, additional staging or storage areas could be required. If the site work is completed but the prefabricated components are not ready, then the construction site may sit idle.

If the parties are relying on traditional construction contracts rather than collaborative or alliance contracting, liability for delay and interface risk could make the head contractor’s participation in the project uneconomic.

Financing

Industrialised techniques and technologies with a limited track record may struggle to obtain the required finance from lenders. Those that Those that do approve these projects may require a significant upfront equity commitment or impose higher interest rates to compensate for what they see as higher risk.

Additionally, lenders will often limit the proceeds of drawing down such loans to site work, component delivery and project completion milestones. This requires contractors to maintain greater amounts of working capital, and may also result in additional upfront costs.

Subcontractor supply chain

Tier one contractors are only as strong as the weakest link in the project supply chain. Some suppliers may need additional support to fully integrate into the subcontract chain: for example, they will need to use the same software or have access to the same data.

All parties in the subcontract chain needs to understand how they fit into the new ecosystem and how they interact with it. This will also feed through to the contractual risk allocation provisions down the supply chain.

Logistics

While the prefabricated work itself is executed in a predictable factory environment, component-based construction requires additional logistical considerations. Controls must be put in place to ensure that equipment and modules are delivered to the construction site on time and undamaged. Size, shape and materials have to be considered, and added costs must be budgeted for transportation, packaging material and insurance. This is particularly the case for long lead-time items, or those that are too large to be transported on public road networks.

Lead contractors will have to mitigate their exposure to logistical shocks that do not necessarily arise in a traditional construction model: unforeseen events such as the recent blockage of the Suez Canal by a container ship, or industrial action at ports, will need to be factored in. There may be potential to develop relationships with trusted partners who are willing to share the logistical load and defray risk.

Labour

To reduce some of the logistical risk and costs associated with offshore manufacturing and shipping, it might be preferable to ‘onshore’ manufacturing of certain components. This will require investment in domestic factories; hiring, training and upskilling local employees; and procuring manufacturing equipment. However, under collaborative contracting models, there may be the potential to share some of these costs.

Change management

For the existing construction workforce, significant and long-term changes, if not wholescale restructuring, are likely. Careful management of any such exercise will be needed to avoid staff unrest.  Early engagement with unions will be enormously important.

Maintenance

Operators and maintainers of major infrastructure assets will need to engage with the modern methods of construction used. They will need to have access to background IP, data and spare parts in order to properly maintain assets.

Poor industry perception

Previous industry experience means that some in the industry view industrialised construction products as substandard and lower quality. Although this is no longer accurate, work is required to re-build industry trust.

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