MMC and Structural Defects Warranties in technicolour

Modular construction is very much part of our next generation housing stock. To promote its take-up it needs support structures, very similar to the technology that assists with the new ways in which we are working today.

One of these key support structures is the structural defects warranty.

Here alongside building warranty specialists ICW, we explore how various stakeholders approach a structural defects warranty, looking in turn at the point of view of each party throughout the process.

Defects in construction projects

A contractor might well be the first port of call for remedying defects in the design and workmanship in construction projects. This is of course a simple statement. If there is a claim the owner has to navigate through potential pitfalls. They will need to know details such as how the project was originally procured, i.e. did the contractor take on single point responsibility or was it more decentralised via a construction management route as is more common in projects incorporating modern methods of construction (MMC). The procurement structure affects the scope and extent of the liability of each party to the owner in contract, if of course there is direct contractual recourse.

Other issues to navigate include: the contractor could have suffered an insolvency event, contractual documents can have limitations (and blocks on enforceability), or the ultimate end-user/owner may not have any contractual recourse against the contractor or MMC supplier. Professional indemnity insurance can also either be inadequate or the claims process could be quite stringent, so with all this to consider it can very quickly feel like jumping through hoops in a circus.


Why have a structural defects warranty in place?

A structural defects warranty, also known as Latent Defects Insurance or a building warranty, covers faulty materials, workmanship and/or defects for newly developed properties and/or  renovated/converted buildings for a period of 10-12 years after practical completion.

It is generally a requirement within the UK Finance Lenders’ Handbook (UK Finance) that all new build or converted properties have a structural warranty in place.

Although it can never be a total substitute to a collateral warranty, as a collateral warranty (subject to its terms) can offer broader coverage, a structural defects warranty has a number of advantages. It can mitigate the risk of a contractor insolvency situation by providing balance sheet protection to developers. It improves the saleability of the completed build. It is therefore a useful asset to have in a development deal as an addition to existing contractual routes such as collateral warranties.

This is also particularly relevant in projects incorporating modular construction where a total system failure can be catastrophic to the project and its later use. Here a structural defects warranty is backed by a rigorous accreditation procedure which rubber stamps the modules.


The importance of timing

Timing is key with such structural defects warranties. Patent defects (usually subject of regular inspections) tend to be captured at practical completion and during the contractual defects liability period in construction projects.

For those latent and undiscovered defects in the structure (and/or modules) that only arise sometime after practical completion the structural defects warranty can step in to help an owner with a simple claims process that does not also necessarily rely on proof of the contractor’s or MMC manufacturer’s negligence. In this sense it is no different to what we are used to under a traditional build context.

What does this look like in practice?

To explore this further we have developed an example scenario that focuses on structural defects warranty in a project, enacted by multi-parties.

So let's assume we have a development that is due to finish shortly:

  • The developer needs to finish the project on time as it has certain units which it needs to deliver to a social housing client;
  • The remaining units will be sold on via private sales;
  • The developer wants to undertake the development using modular construction;
  • The modules are being produced by the main contractor, also the principal contractor on site; and
  • There is also an end-user/owner who wishes to purchase one unit, and as expected they are supported by their mortgagee bank.

1. The developer’s list of considerations:

1.1 What must the developer do to obtain any accreditation before the structural defects warranty provider will agree to provide cover?

The developer must be aware that their principal contractor must have a system accreditation in place before certificates of insurance are issued by the warranty provider. Confirmation of this position will be contained within their quotation subjectivities.

1.2 Is the application process for modular construction any more onerous than that for a traditional build?

No. Once a system accreditation is in place an application for a modular construction is just as simple at the initial quote stage and ICW can liaise directly with the principal contractor throughout.

1.3 Developers are generally responsible for any snagging defects raised by purchasers during the first two years of ownership. Does this differ for the ICW warranty cover?

Pursuant to the terms of our policy, liability for the two-year defect period automatically rests with the developer. However, it is for the developer/contractor to decide and confirm to ICW which entity will be taking responsibility for that two-year liability period and to enter into an indemnity agreement with ICW in respect of this specific liability. The nature of the build (whether traditional or modular) does not change this position.

1.4 Have ICW seen any difference in snags in projects incorporating modular / off-site construction v traditional build following completion of plot sales?

Our surveyors are there to risk assess for potential claims. From ICW’s perspective the construction of modular buildings does not provide any greater risk, provided that the build process in the factory has been assessed from the start of build to the deployment on site.

1.5 Can properties be moved under the warranty – for example can the developer use a property as a show home and then pack up to move to another development?

All properties will have to be completed within building regulations and signed off by building control. Once building control have finalised and issued a certificate for a unit it must remain at that address in order to procure a warranty. If it is moved, it will be subject to building control sign-off again and may require an additional structural condition report. These circumstances can be discussed on a case by case basis.

2. Enter the contractor to design & build, and some considerations relevant to them:

2.1 The ICW accreditation is associated with the contractor rather than the developer. What is the process for obtaining this accreditation?

Accreditation is obtained through a number of steps. These are set out below:

a) A desktop study will be completed on the modular build system and the components which go into the build;

b) One of our specialist surveyors will attend the factory and go into further depth around the internal reporting of the build process and assess any potential risks at deployment stage; and

c) An accreditation certificate is issued for 12 months with the subjectivities of continual inspections taking place.

2.2 What are the costs associated with this accreditation?

The accreditation is costed in a very competitive way and will be based upon the location of the factory.

The cost of accreditation is separate from the cost of any structural defects warranty for the premises. The cost of the warranty is calculated based upon the proposed reinstatement cost of the building.

2.3 Is this accreditation reviewed regularly?

Our inspector will attend the factory on a quarterly basis to ensure all practices are being completed to the agreed standard.

2.4 How do the checks carried out during the build process differ from that of traditional build?

In a traditional pre-construction build we would have 7 stages of inspection. As a traditional build is a lengthier process our surveyors can visit the site regularly and observe each stage. Those stages would be at foundation stage, again as the build gets to sill and also first floor level, as the roof is being built/covered, and pre-plaster works on the building and then a final inspection stage.

On a modular site we can see the foundations being poured and then the final unit being bolted in to place and works reaching practical completion, effectively 2 inspection dates. Our accreditation process effectively covers the 5 stages in between that are not observed on site.

2.5 Is this cover only for the modular build elements or will it attach to any substructure works?

The structural defect warranty will be for the entirety of the project; however the accreditation is simply for the modular build aspects.

3. To use and enjoy the unit, from the end-user/owner’s point of view:

3.1 What document from ICW should matter most to the ultimate end-user/owner?

The ICW Structural Defect Warranty Final Certificate. This certificate is provided to the developer at the conclusion of the build and provides insurance for a total of ten years (or twelve years depending on the product selected).

3.2 Is any guidance provided on how to care for an MMC property and what about undertaking minor works (such as adding shelves, broadband connections etc.)?

ICW are a warranty provider, these are development specific questions that the developer would have considered and established via their maintenance manuals and use protocols. We would suggest that any such query from an end-user/owner should be directed to the developer.

3.3 Is it possible for cover to be extended to include extensions or alterations to the property?

Yes, provided the end-user/owner have consulted with the developer/contractor and completed a structural condition report on the property and are able to provide a scope of works for the alteration. We would look at this on an individual basis but certainly could be covered subject to our underwriting principles.

4. A key player in building new homes, from the social housing provider’s point of view:

4.1 What document from ICW should matter most to the social housing provider?

The ICW Structural Defect Warranty Final Certificate.

4.2 With regards to social housing units, are there any differences in the warranty processes?

No, not throughout the quotation process. However social housing does normally require 12-year cover rather than 10-year cover. ICW has a 12-year policy which already meets the needs of a number of social housing providers.

5. Future-proofing the build, questions relevant to a future purchaser:

5.1 How would a future purchaser buying the property from the end-user/owner know that the property was constructed using modular construction?

The proposed purchaser may not be immediately aware; however it is likely that it would become apparent via due diligence being carried out by the purchaser’s surveyor in the first instance.

5.2 Should such a future purchaser be instructing a specialist surveyor; particularly where the property may have been altered or extended?

It is unlikely to be necessary for a proposed purchaser to obtain a specialist surveyor, any experienced surveyor would be able to survey the property. As above, if they are completing these extensions they would require input from the MMC contractor, a structural condition report and a scope of works before receiving the structural warranty, this gives comfort that it has been checked.

6. From the point of view of the mortgage lender and their security:

6.1 ICW new build warranty is acceptable to the majority of Highstreet lenders. Does the ICW cover for modular properties provide the same level of cover to purchasers and their lenders?

The ICW Structural Defect Warranty provides the same comfort to a lender regardless of build type.

6.2 Does the life expectancy of an MMC building differ from traditional build and how does this affect the warranty provision?

It is difficult to put any life expectancy on different types of builds; however our robust accreditation programme is in place to confirm that the same levels we would expect on site with traditional build is adhered to in a factory environment.

6.3 Do manufacturers underwrite warranties? If not, why do they come to you instead of providing direct warranties to the end user?

Whilst some manufacturers may provide a warranty or guarantee for its products, it is unlikely that it will be backed by an insurance product. In all cases a manufacturer guarantee would not be sufficient for all aspects of the build; nor would it meet the requirements of UK FinanceCML. It is for this reason that manufacturers work with us due to our insurance capacity and our existing bank approvals.

6.4 The example here is in respect of modular construction, what other systems/product do you underwrite and are there any peculiarities in relation to "accepting" those systems/products?

At present we will only provide accreditations on a modular build system, we may move into modular products in the future but at present our focus is on modular build systems and the accreditation of those systems.

This article is a collaboration piece to build crucial industry links to positively enable the take-up of MMC and its role in sustainable construction.

The authors are Michael Halfpenny (Head of Business Development, ICW), Suriya Edwards (Managing Associate, Construction, Foot Anstey LLP) and Katie Shire (Associate, Conveyancing, Foot Anstey LLP).

For further details on MMC and stress-testing contracts please contact Foot Anstey LLP or for the ICW structural defects warranty and MMC accreditation, please contact ICW via [email protected] .

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