The NSW Construction Reform Strategy

 Compliance and quality in new residential buildings

 

The National Construction Code (NCC) is a performance-based regulatory system that provides the standards buildings must comply with, supported by reference documents from Australian Standards, the Australian Building Code Board (ABCB), and other protocols and standards. The Building Code of Australia (BCA) sits within the NCC and is given effect by state and territory legislation. These regulations cover building work, products, and registration or licensing requirements for practitioners, and their objectives are the proper construction of buildings and the health and safety of the people using those buildings. Although construction is extensively regulated through the NCC under both state and federal legislation, during a boom in apartment building after 2014 the number of defects in these new buildings became a major issue. 

 

Figure 1. NSW apartment building

Source: ABS 870102. 

 

After a series of building failures highlighted widespread lack of compliance with the NCC, Bronwyn Weir and Peter Shergold were asked to investigate. Their report in 2018 Building Confidence: Improving the Effectiveness of Compliance and Enforcement Systems for the Building and Construction Industry across Australia found: 

• Compliance failures included non-compliant cladding, water ingress, structurally unsound roof construction and poorly constructed fire resisting elements; 
• Practitioners may lack competence and do not understand the NCC; 
• Design documentation was generally poor and resulted in inadequate information; 
• Licensing bodies, regulators and local governments were inadequately funded or lacked skills and resources; and 
• Supervision has generally been by private building surveyors who are not independent from builders and/or designers. 

 

The report made 24 recommendations. Recommendation 1 was for registration of building practitioners involved in the design, construction and maintenance of buildings, and 10 was for building surveyors. Recommendation 3 was for practitioners to undertake compulsory Continuing Professional Development on the NCC. The key recommendations 6 and 7 were for effective regulatory powers and proactive regulation, with mandatory inspections (recommendations 18 and 19), and recommendation 21 for compulsory product certification. Recommendation 8 was for a design review relating to fire fighting, and 17 was for an independent third-party review of the designs before work commences. Other recommendations were 12, for a building information database that provides a centralised source of building design and construction documentation, and 20 for a building manual for commercial buildings to be available on completion. 

 

These recommendations addressed the serious problems of building defects and non-compliant materials that were the primary motivation for the Building Confidence report. The report concluded ‘The compliance and enforcement systems have not been adequate to prevent these problems from emerging and they need to change as a matter of priority. There is no panacea or ‘silver bullet’ to resolve these problems. Our 24 recommendations … will address weaknesses in a … pragmatic, risk-based approach’ (p. 4). 

 

The scale of the problems of building defects in new apartment buildings built after 2015 required a new regulatory approach, and the Construct NSW reform strategy was the result.

 

The NSW Reform Strategy 

 

The New South Wales Government responded to the Building Confidence report with the Construct NSW strategy, which had six elements: regulation, key player ratings, education, contracts, digital tools, and data and research. In 2019 the Berejiklian Government established the Office of the Building Commissioner (OBC) to implement the reform strategy and appointed industry veteran David Chandler as Building Commissioner. In 2020 two significant pieces of legislation to regulate new construction work were introduced. With these Acts the Building Commissioner could audit building plans, monitor and scrutinise suspected wrongdoing, and take disciplinary actions such as suspending or cancelling registrations, refusing to issue occupation certificates, and ordering rectification of non-compliant building work.

 

The Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (RAB Act) allowed the OBC and Department of Customer Service to investigate building work and require rectification of defects for up to six years after the occupation certificate was granted. The Department can delay issue of an occupation certificate until identified issues are addressed, and these orders are public while they remain in force. The definition of a ‘serious defect’ in the Act is a failure to comply with the BCA, Australian Standards or approved plans. The RAB Act gives the Building Commissioner powers to enter construction sites and issue orders for the rectification of serious defects before occupation certificates can be given.

 

The most significant power requires developers to sign enforceable undertakings that the developer refrain from certain conduct which contravenes the Act or take action to prevent or remedy a contravention of the Act. A Building Work Rectification Order requires developers or principal contractors to remediate serious defects prior to the issue of an occupation certificate, and a Stop Work Order is issued if the Building Commissioner is satisfied that work being done could result in significant harm or loss to the public or occupiers of the building.

 

The second piece of legislation was the Design and Building Practitioners Act 2020 (DBP Act), which had three requirements:

1. New registration requirements for designers, engineers, specialists and builders to show they are adequately qualified;
2. To require designers to lodge building designs before construction starts, and builders lodge ‘as-built’ plans upon completion. Builders must also declare that the completed building complies with the lodged designs and the BCA. The requirements on practitioners to register, lodge plans and make declarations came into force in July 2021; and
3. A statutory duty of care for practitioners, so owners can sue if a person who carries out construction work fails to exercise reasonable care to avoid economic loss caused by defects. The duty of care has been in force since June 2020 and applies retrospectively, where economic loss has become apparent in the 10 years prior to 2020.

 

The DBP Act imposed a retrospective statutory duty of care to avoid economic loss caused by defects or construction work. It applies to professionals who perform construction work including builders, designers, product manufacturers and suppliers. In July 2021 the second stage of the Act introduced compulsory insurance, declarations to be given by designers and builders to ensure compliance with the BCA, and a registration regime for engineers. 

 

Also, in July 2020 the Building and Development Certifiers Act 2018 and the Building and Development Certifiers Regulation 2020 came into effect, with stronger conflict of interest provisions and penalties for breaches by certifiers. The Act and Regulation include similar provisions to those in the DBP Act for building and design practitioners to be registered, for suspension or cancellation of registration, and having adequate and current insurance. The NSW Department of Fair Trading provides a certifier practise standard, a condition of licence for all certifiers working on multi-storey Class 2 buildings [1].

 

Another initiative was micro-credential TAFE courses being offered to practitioners. There are now three dozen of these courses available, ranging from asbestos to waterproofing, with courses specifically on the NSW legislation and its operation, the NCC, and fire and rescue requirements.

 

Further Developments 

 

Since the legislation in 2020 there have been two other NSW Government policies introduced, two court cases, a Strata Hub and a Defects Library created. A new agency was formed when the Building Commission NSW commenced on 1 December 2023, bringing together the Office of the Building Commissioner and NSW Fair Trading building functions into a single specialised organisation focused on quality and compliance of residential buildings employing over 400 people.

 

In November 2022 the NSW Government started Project Intervene, a program to resolve serious defects in the common property of buildings that are up to ten years old. The Department of Fair Trading negotiates a legally binding undertaking with the developer for the benefit of the owners corporation. A building is not eligible for Project Intervene if the developer or the builder are no longer trading. Under Project Intervene, there was no cost to the owners corporation as the developer pays for the remediation works and all associated costs. Other defects might be remediated at the same time but are agreed to separately by the developer. An owners corporation could register for the program up to 30 June 2023, and 152 buildings registered involving 14,523 apartments.

 

Project Remediate was a 2022-2024 program to help remove combustible cladding on an estimated 225 buildings, of which over 135 are in process. It is a voluntary (opt-in) program that only fixes flammable cladding and offers a 10-year interest-free loan to fund remediation work [2]. Government support is provided to owners corporations through quality assurance and program management services, with a $10,00 to $15,000 payment to help cover strata management costs for participating in the program. 

 

In 2023 the NSW Court of Appeal in Roberts v Goodwin Street Developments confirmed an earlier Supreme Court decision that building practitioners owe a statutory duty of care under the DBP Act for all building work, not just residential building work or work on a Class 2 Building. The decision also confirmed owners can hold project managers, superintendents, directors and shadow directors personally responsible for building defects. 

 

The decision in Roberts extended the RAB Act’s definition of a serious defect to all buildings and the duty of care of individuals was confirmed. However, when designing a project, a number of designers and consultants will be involved, some of whom may work for one firm. How the duty of care is allocated between individuals that sign certificates and professional services firms that are contracted for work on a project was not clarified. The uncertainty around this issue was a factor in the significant increase in Professional Indemnity insurance premiums. 

 

In 2024 an Owners Corporation of a residential strata building brought proceedings against Pafburn (head contractor) and Madarina Pty Ltd (developer) for alleged negligence leading to defective construction work and breaching the statutory duty in the DBP Act. The High Court of Australia in Pafburn Pty Limited v The Owners – Strata Plan No 84674 considered whether a developer or head contractor can reduce their liability when faced with claims and found head contractors cannot delegate works to avoid liability. 

 

The NSW Strata Hub was another initiative, establishing a register of strata schemes with information on the number of lots, the occupation certificate, strata scheme management information (committee secretary, strata manager, building manager, the annual general meeting) and the scheme’s energy and water performance rating where available. 

 

The Building Commission has created an online Building Defects Library that lists the most common building defects for Certifiers, Councils and other relevant industry members to help drafting of formal communication to rectify defects.

 

Developer and Contractor Ratings

 

Another element in the NSW reform strategy was the introduction of a ratings system for developers and contractors. This is called iCIRT (independent construction industry rating tool) and uses data on creditworthiness, insurance history, regulatory breaches and legal claims, to assign a rating available to government, industry and the public. Developed by Equifax, a credit rating firm, iCIRT ratings are based on a relative risk ranking. Businesses are assessed relative to others that share the same role (i.e. builders are compared with builders) and size (i.e. small firms with small firms) and a Development Risk Index compares a business to the industry average. These ratings are based on six criteria:

1. Character: the business, its directors and key persons, the holding company, related parties, shareholders and owners;
2. Capability: the tenure and trading history of the business and officeholders experience, licences and qualifications, the track record on previous projects and insurance and claims history;
3. Conduct: includes the commercial history, court judgments and litigation, industrial disputes, tribunal decisions, payments to employees and subcontractors, and any regulatory intervention;
4. Capacity:  the project pipeline and capacity to meet commitments, business solvency and ongoing sustainability;
5. Capital: capitalisation and funding sources, access to funding and borrowing capacity; and
6. Counterparties: the exposure of the business to related parties in the supply chain and capacity to withstand disruptions.

 

Equifax and iCIRT provide a star-rating outcome from zero stars (unrated) to five stars (more trustworthy) and there are three levels of assessment. Gold Ratings are a detailed assessment where the business and/or build team have fully participated and provided all requested disclosures for a comprehensive review, including key person consents for expanded background checks. Silver Ratings are a standard review where the business and/or build team have provided a number of required disclosures, with key person consents to basic background checks. Bronze Ratings are a brief review using all available public and proprietary data that does not require consent or the participation of the rated business or build team, with no key person checks. 

 

Despite ICIRT’s role in improving accountability and trustworthiness in NSW construction getting a rating is voluntary, as is making it publicly available once acquired. By February 2024 there were 163 builders and developers, plus a few architects and others, listed on the ‘Register of Trustworthy Constructors’. About a dozen had been withdrawn or not renewed and several were waiting for updates. 

 

In a LinkedIn post on Feb 6^th David Chandler said ‘The number of iCIRT rated builders and developers continues to grow. Recent statistics indicate that over 35% of builders and developers with turnover greater than $5.0m pa are now rated. These statistics further indicate that over 50% of developers and builders by volume are iCIRT rated in NSW.’

 

Decennial Liability Insurance

 

Decennial liability insurance (DLI) is an insurance product that enables owners corporations to have a serious defect fixed up to ten years after an apartment building is first occupied. With DLI the work is done without litigation to establish fault, removing a major barrier for owners corporations. In November 2022 the Building and Other Fair Trading Legislation Amendment Bill made DLI an option for developers of multi-storey apartment developments in NSW, so a developer with DLI will not be required to provide a building bond. NSW is the only Australian jurisdiction where DLI is offered, although it is available in over thirty countries.

 

DLI provides residential apartment owners with comprehensive consumer protection for building defects caused by substandard design and building work. It ensures that building owners can remediate those defects because the costs are covered by the insurance policy if a builder or developer is unable or unwilling to fix the defects, including if the developer becomes insolvent. There is currently one provider of DLI, Resilience Insurance.

 

DLI increases involvement of insurers in the design and construction of projects as they take a more active role in monitoring projects through technical inspections, site investigations or due diligence. Regular, independent technical inspections are the basis of DLI, and premiums for highly rated developers and builders should be lower than those with a lower rating and/or a history of buildings with defects. 

 

A fundamental problem had been a lack of supervision to ensure and maintain the quality of work on residential building projects. For contractors, responsibility for compliance with relevant codes and practices requires supervision from the issue of the construction certificate to hand over to the client. For developers, supervision is required to prevent an order under the RAB Act that will damage their reputation and affect consumer confidence in their product. With the ratings tools now available, the cost of independent design reviews and adequate supervision of work may be offset by reduced financing and insurance costs. 

 

Report on Progress in 2023

 

In 2023 a Review of the Implementation of Building Confidence recommendations was published by the Australian Construction Industry Forum, with details on the progress made on each recommendation across the states. Based on that report Bronwyn Weir gave an update on progress on the Building Confidencerecommendations in a webinar presented to the Australian Institute of Quantity Surveyors and the Australian Construction Industry Forum, reported by Andrew Heaton on Sourceable. According to Weir progress varied across jurisdictions. NSW was leading with increased compliance and enforcement and a proactive audit program. 

All states had or were working toward a compulsory code of conduct for building surveyors, and there had been improvements in accountability for performance solutions and performance-based design. The ABCB had developed model guidance so states and territories could implement recommendations in a nationally consistent way. On other recommendations implementation had been mixed. For example:

• Several states had broad schemes for mandatory registration of design and building practitioners, but none were as comprehensive as the National Registration Framework developed by the ABCB (recommendations 1 and 2 of the report).
• Only Tasmania required building practitioners to undergo compulsory continuing professional development on the NCC (recommendation 3).
• No state had instituted any substantive reforms to support career pathways for building surveyors and certifiers (recommendation 4).
• NSW and Victoria have increased regulatory compliance and enforcement action (recommendations 5, 6, 7, 9 and 11), Queensland and Western Australia have ‘light touch’ regulation.
• NSW had strengthened the role of fire authorities in building approval processes, however no state had instituted a code of conduct for fire safety engineers (recommendation 8).
• NSW had and some other states were working toward centralised digital lodgement of building approval documents (recommendation 12), but Queensland, Western Australia and Victoria are not. The ACT and Northern Territory were already doing this. 
• No jurisdiction required a comprehensive building manual be handed over to owners on building completion (recommendation 20).
• There had been insufficient action on regulation of building product compliance. Only Queensland had a supply chain accountability law.

 

Table 1A. Summary of progress in 2023

Table 1B. Summary of progress in 2023

Source. Table provided to Sourceable by Weir Legal and Consulting

 

Surveys on Building Defects

 

The NSW Building Commission has done two surveys on defects in apartment buildings. The 2021 survey on defects in strata buildings over three stories that were completed in the previous 6 years found:

• 39% of strata apartment buildings surveyed had a serious building defect in the common property.
• Of the buildings with a serious defect, most were related to waterproofing (63%), followed by fire safety systems (38%), structure (27%), enclosure (26%) and key services (17%).
• The time taken to resolve defects varied greatly across the sample, with around 38% of buildings taking over 12 months and 25% taking less than 6 months. 
• Only 15% of the buildings with serious defects were reported to NSW Fair Trading;
• The average cost of remediation was over $300,000 (including rectification work, legal expenses, and other professional services. Owners corporations were not able to recover these costs, which were covered by special levies (34%) or an increased annual budget (29%).

 

The second survey in 2023 found 53% of strata buildings in New South Wales had serious defects, the increase from 39% in 2021 suggesting increased engagement from strata communities [3]. The survey found that defects in newer buildings trending down since 2020, driven by a decrease in buildings with waterproofing serious defects, and consumers were more confident in reporting defects to the regulator. The most common defects were: Waterproofing (42%); Fire safety systems (24%); Building enclosures (19%); Structural issues (15%); and Key services, such as lifts and plumbing (14%).

 

 

Figure 1. NSW Defects survey

 

Source

 

In his Foreword to the 2023 survey Building Commissioner David Chandler [4] said: 

Since the commencement of the NSW Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 developers and builders associated with the construction of apartment buildings with serious defects are increasingly held accountable to fix them. As of 1 November 2023, 465 RAB-Act-related audits have been conducted involving more than 29,000 apartments. Development financiers are now paying attention to how they can lower these risks.

 

We are also seeing the positive impacts of the Design and Building Practitioners Act 2020. Since the DBP Act commenced in July 2021, 94 DBP Act audits have been conducted, involving over 10,000 apartments. Across NSW, apartments are now commencing with a much higher resolution of design before construction starts on site. This shift of approach is being reported by builders as leading to less rework, less waste and improved construction times. On-site we are observing far greater awareness of what compliant construction work looks like.

 

Conclusion

 

The scale of the problems of building defects in new apartment buildings built after 2015 required a new regulatory approach, and the Construct NSW reform strategy was the result. Following the recommendations of the 2018 Building Confidence report on non-compliance with the BCA, building failures and defects, the NSW Office of the Building Commissioner was established in 2019 and David Chandler appointed Commissioner. In 2020 the Design and Building Practitioner Act and the Residential Apartment Building Act came into effect. The goal of the NSW reform strategy was to restore confidence in newly built apartment buildings. 

 

The issues addressed by the regulatory reforms in NSW were accountability for the quality of work done, and access to data and transparency about a building’s quality or lack of it. Under the 2020 legislation there are two key requirements:

1. Designers must design properties in compliance with the BCA; and 
2. Construction workers must build properties according to those designs and must build in compliance with the BCA.

To implement the strategy and enforce the legislation the OBC could inspect plans, visit sites, and stop work to prevent defects, and in David Chandler had a highly energetic and effective Building Commissioner. In 2023 the Building Commission NSW bought together the OBC and NSW Fair Trading building functions into a single agency employing over 400 people, focused on compliance of residential buildings.

 

Firms and their employees affected by the DBP Act have had to incorporate its requirement for registration into their business plans to operate in NSW. For many this is not onerous, but for some it is challenging. Similarly, getting an iCIRT rating is difficult for firms with a poor track record, but is an opportunity for good firms to establish themselves as trusted and trustworthy, and for their relationships with suppliers, consumers, insurers and financiers to benefit from being highly rated.

 

The iCIRT ratings scheme for constructors and developers identifies a ‘trustworthy building’ that is fit for purpose, resilient and measurably less risky for the owners, financiers and insurers. With the introduction of the iCIRT ratings scheme and Decennial Liability Insurance, NSW became a leader in increasing the accountability of developers and contractors. Although there are some similarities with insurance-based systems for regulating construction such as the Miller Act in the U.S. and the French system, the scope of the RAB and DBP Acts is wider and those other systems do not include the same inspection powers. 

 

The NSW Government’s Construct NSW strategy was a response to repeated failures in design, construction and certification of buildings. The objective of the NSW strategy was to restore public confidence in new buildings after high profile building failures and widespread defects, with the associated financial burden and misery for owners of affected apartments. This was a multi-pronged strategy based on a Building Commission with new powers for increased inspection of designs and building work, data driven audits of companies and projects, registration and education of practitioners, a ratings scheme for companies, and introduction of ten year defect insurance. This comprehensive strategy has placed NSW firmly at the forefront of construction industry reform in Australia. 

                                                                        *

 

 

[1] Class 2 buildings are multi-storey, multi-unit apartment buildings or mixed-use buildings with shops and apartments. 

 

[2] The problem of flammable cladding in Australia was covered in a previous post, on both the extent of the problem and the differences between the states in their response. 

 

[3] The time and cost of remedial work on defects has increased under the DBP Act because some work that previously was done after agreement between an Owners Corporation and contractor now requires a Development Application. 

 

[4] David Chandler’s term as Building Commissioner finished in mid-2024, and in October James Sherrard became the new Commissioner. While the Berejiklian Government gets the credit for establishing the Office of the Building Commissioner and passing the enabling legislation, Chandler was responsible for the success of the reform strategy. 

UK MMC and Manufactured Housing Failures

How not to promote Modern Methods of Construction 

In Australia, Canada, the UK and parts of the US there are problems associated with low levels of new house construction, high prices, rising rents and decreasing affordability. Although modern methods of construction (MMC) cannot solve these problems on its own, it could make a significant contribution if restrictions on its use were relaxed, and governments developed effective policies to expand the market and promote its use. 

 

The UK Government has been a leading producer of industry policies for construction since the 2011 launch of the construction industry strategy, with an updated version following in 2016. Some parts of the strategy have been successful, developing the BIM Framework and BS 19650 standards and increasing the use of BIM with a public sector mandate (discussed in a previous post here) in particular. Also, between 2019 and 2022 the Transforming Construction Challenge completed 68 projects.

 

In contrast, the UK policy to promote manufactured affordable housing has been a notable failure. Over 2022-23 MMC companies that collapsed were Ilke, House by Urban Splash and Modulous, and L&G closed its housing factory (in image above). In late 2023 the UK House of Lords Built Environment Committee started an inquiry into manufactured housing, and this post is based on the report from the inquiry and transcripts of evidence given. The report (in the form of a letter to the Secretary of State for Levelling Up, Housing and Communities) provides some insight into an agency that has not published any data on the twin policy objectives of increased supply of affordable housing and increased use of MMC. 

 

Background

 

In 2017 the Government committed to increased housing supply using MMC by supporting the growth of the industry. MMC describes a wide range of non-traditional building systems and in the UK is divided into seven categories, from completely built offsite (Category 1) to completely built onsite with some automation (Categories 6 and 7). The policy to promote MMC was supported by the Construction Innovation Hub and the Advanced Industrialised Methods for the Construction of Homes (AIMCH) project, which both ran for three years over 2020-22 funded by UK Research and Innovation through the Industrial Strategy Challenge Fund.

 

The agency responsible for increasing use of MMC was Homes England, established in 2018 to fund new affordable housing (replacing the Homes and Communities Agency set up in 2008). The Strategic Plan 2018-23 described Homes England as ‘a new non-departmental public body, sponsored by the Ministry of Housing, Communities and Local Government … to accelerate the delivery of housing across England, except in London’ and explained ‘Our mission is to intervene in the market to ensure more homes are built in areas of greatest need, to improve affordability. We’ll make this sustainable by creating a more resilient and diverse housing market.’ There were six objectives in the Strategic Plan, the third of which was to improve construction productivity by supporting MMC:

 

We must embrace change to improve productivity and reduce the impact of the declining workforce. MMC has the potential to be significantly more productive than traditional methods of construction and greatly increase the pace of delivery. It can also improve the quality of construction, address labour and materials shortages and deliver a number of additional benefits such as improved energy efficiency and health and safety. As a result, developers are already introducing MMC. However, the MMC industry is currently immature with limited production capacity and supply chains. It requires stimulus if it is to evolve further.

 

We will support the uptake and development of MMC through a range of interventions. We’ll incorporate MMC into our building lease disposals to demonstrate a range of MMC products by supporting pilot projects on Homes England land. We’ll also encourage partners to use MMC through our provision of development finance to developers. Our Local Authority Accelerated Construction programme will also encourage more widespread use of MMC to help increase the speed of construction and build out.

 

 

Inquiry Report

 

After the collapse and closure of the two major Category 1 MMC businesses, Ilke Homes and House by Urban Splash, in late 2023 the UK House of Lords Built Environment Committee started an inquiry into MMC in housing ‘to explore the potential reasons for these failures, especially considering the support provided by the Government to the industry.’ 

 

The inquiry made some pointed observations. Homes England could not provide data on the extent of MMC across its portfolio, despite that being its measure of success, and has not developed an evidence base or published research on MMC as promised. An MMC Taskforce, which was expected to work on data and standards, has never met. Some key points from the report were:

 

‘we have been told … Category 1 housing is, or could be, more expensive than homes built using traditional construction methods … we heard that MMC homes are cheaper. These two statements cannot both be true’ (p. 3).

 

‘We have limited confidence that a coherent plan to encourage the use of MMC is in place and, owing to the absence of its publication, have found it challenging to scrutinise the Governments activity and spending’ (p. 4) 

 

‘It remains unclear both how Homes England is assuring itself that Affordable Homes Programme (AHP) providers in receipt of grant are meeting the pre-manufactured value (PMV) requirements and when this data will be published’ (p. 7). PMV measures how much of a project’s gross construction cost is derived from pre-manufacturing with all seven MMC categories contributing to a higher PMV. 

 

‘The current approach taken through the AHP does not stipulate the use of Category 1 and 2 MMC. The requirement for 55 per cent of the PMV of the home to be MMC allows many housing associations to use MMC from Categories 3 to 7 … the majority of MMC delivery has a low pre-manufactured value’ (p. 8)

 

‘We were particularly disappointed by the attitude of insurance providers and the warranty providers towards MMC. The extensive time periods it can take to obtain warranties and the reticence of insurance providers to accept compliance with building regulations as sufficient is having a detrimental impact on the delivery of MMC homes’ (p. 13).

 

'Homes England made significant investments from the £4.5 billion 2015 Home Building Fund which directly supported Ilke Homes (£60mn) and House by Urban Splash (debt facility of £26.9mn and equity of £3.1mn). Homes England expects limited recovery of its investment into Ilke Homes and full recovery of its loan to House by Urban Splash, though not the equity’ …  'it is still unclear why Homes England chose these two companies and what its selection criteria and objectives were’ (p. 15).

 

‘It is also unclear why the Government is not allowing experienced international MMC companies to apply for procurement processes and stipulations. Volumetric MMC housing is successfully delivered in other countries. The Government should ensure that its procurement practices do not limit the ability of successful MMC companies from around the world in moving into the UK market’ (p. 16).

 

‘we came away from our inquiry with the impression that the Government had too easily accepted that undirected and nonstrategic investment of public money was the obvious way of providing this assistance. We say that because the Government has not set out clear objectives for the investments and funding it provided. Nor did Homes England give us any clear metrics as to how success (however defined) was to be measured and over what timescale’ (p. 18).

 

The report also pointed out that ‘MMC has been commercially successful in other sectors and blocks of flats, as illustrated by build to rent and student housing’ (p. 3). In evidence given by industry to the inquiry affordable housing is not a viable market segment for MMC because traditional methods are cheaper in some parts of the country and volume manufacturing requires an  sustained high level of demand, so for the failed companies the ‘level of investment expended relative to the demand was the fundamental flaw’. Examples given of successful MMC projects in the UK were medium and high-rise buildings, hospitals, prisons, detention centres and defence housing. 

 

Conclusion

 

What does this tell us about Homes England’s MMC policy and implementation? There are a few basic principles for industry policy. The first is to be technology agnostic, meaning the funding should be allocated on the basis of meeting the policy objectives, not on the basis of a preferred technological solution. In this case there was no good reason to prefer Category I MMC builders over Categories 2 – 5, and there was no evidence that the final cost of Category I volumetric buildings were cheaper that alternative MMC builds. 

 

The second basic principle is to avoid picking winners. If funding is to be provided it should be available to any firm that can meet the criteria set and policy objectives. Making equity investments in firms, as Homes England did, is not appropriate and has a long history of failure. Typically, industry policy funding is through either credit support or incentives, rarely a combination of both, as many studies of policies in different countries for specific industries have shown.

 

Finally, industry policy funding will be most effective when used to stimulate demand. Homes England contracted a total of £137mn to local authorities to deliver 9,969 homes using MMC in Categories 1 to 5, although the inquiry was unable to establish how many had been delivered. The Affordable Homes Programme made funding available to housing associations using MMC through strategic partnerships, long-term deals under which partners must build at least 1,500 homes and deliver 25 per cent of those homes using MMC. However, the inquiry found the majority of AHP houses had a low PMV with a lot due to Categories 6 and 7. Here the objective of increasing offsite manufacturing was undermined by accepting onsite work as MMC. 

 

UK manufactured housing provides a good example of how not to do industry policy for construction. The ‘undirected and nonstrategic investment of public money’ was both wasteful and probably ineffective (given the lack of data on outcomes). Homes England did not develop standards or provide data that would have encouraged insurance and warranty providers to support MMC, and excluded international firms with experience with MMC from entering the market that could ‘help improve the maturity of the market, and provide the data and evidence called for by warranty and insurance providers’. 

 

The concluding paragraph of the inquiry’s report pointed to the complex interplay of factors involved in unblocking supply of housing in general and increased use of MMC in particular:

 

It is possible that real barriers exist in the form of resistance by planning officers and undue risk aversion on the part of warranty providers, insurance companies and banks. Our short inquiry did not establish clear evidence to make that case, but we believe the Government should look more carefully at how these parts of the housebuilding ecology are working, as well as taking a greater interest in overseas examples of success with modular construction. 

 

This situation is not unique to the UK. Australia, Canada and parts of the US all have similar problems associated with low levels of new house construction, high prices, rising rents and decreasing affordability. Although MMC cannot solve these problems on its own, it could make a significant contribution if restrictions on its use were relaxed. Demonstration sites where examples of modular building are on show could be established. Some publicly owned sites could be recycled and reserved for modular buildings to create a market. An independent agency could collect data on costs and performance. Lending and valuation guidelines could incorporate energy savings from modular buildings. Local governments could be given incentives for allowing new modular buildings and/or extensions to existing houses. Social housing could be required to use MMC. A levy on embodied carbon in building materials would favour modular building, which typically has less waste and lower use of cement and concrete. 

 

MMC is not only Category 1 3D buildings. It includes panellised and structural systems, pre-assembled floor and wall cassettes, kitchen and bathroom pods, and manufactured components such as facades and windows. Many of these are already widely used outside residential construction, and given the opportunity can be used to increase the supply of new housing that is so urgently needed in many places. The focus in the UK on failures of manufacturers of single houses has obscured the success of MMC in medium and high-rise residential buildings and for a wide range of commercial and institutional buildings. 

 

 

Note. Homes England lost another £9mn invested in Stewart Milne, a house builder that failed in January. 

 

 See also https://gerard-de-valence.blogspot.com/2022/09/comparisons-of-construction-to.html