Why Funding for Offsite Construction is Difficult 1

Friday, July 8th, 2016
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Prefabrication and offsite construction are making advances into the construction industry in a variety of ways, yet by almost all accounts, funding for these projects is extremely difficult to obtain, and many say it is impossible.

I’ll outline five reasons contributing to the difficulties being experienced, but before doing so, I should acknowledge that this view of the difficulty in obtaining funding for offsite construction is not founded on hard evidence. Instead, it arises from conversations with offsite manufacturers, enquiries to PrefabAUS, and discussions at industry conferences.

Funding difficulties are apparently being experienced in relation to detached homes built in factories, as well as townhouse and apartment projects with extensive (or almost entire) offsite construction elements.

A variety of ‘workarounds’ have been employed for different projects. To my mind, these workarounds do not constitute ‘project funding’ but rather ways of achieving funding for a project in the absence of the kind of senior debt funding that would typically be available for a traditional build project.

Examples of these ‘workarounds’ are where:

  • the prefab/offsite manufacturer self-funds the full value of the factory-based work until it is delivered to site, installed and certified for bank funding drawdown
  • the prefab/offsite manufacturer provides bank guarantees for all or most of the construction value occurring offsite, thereby providing security against which its progress claims are being funded
  • the prefab/modular supplier offers the client a complete turnkey project, inclusive of the full funding package required to complete the project, thereby replacing the bank as the senior debt provider
  • in the commercial context, the client agrees to progress payment terms with the offsite supplier and funds the progress claims via its own balance sheet, as opposed to project-specific funding provided by a bank
  • the homeowner purchasing a prefabricated home funds progress payments to the home manufacturer from their own resources (such as cash reserves or via a mortgage on another property) not through a facility attached to the home being purchased.

Reasons Funding for Offsite Construction is Difficult

  1. Prefabrication and offsite construction – at around three per cent of construction in Australia – is naturally less familiar to the mainstream construction industry players. Its low but increasing rate of adoption to date also means that the banks and other organisations who provide construction funding have had little if any exposure to it. This lack of familiarity is understandable, but it creates an extra hurdle to overcome (just as most new ideas can encounter resistance until they are able to break through.) This is further compounded when we consider that the feasibility, business case and funding application and approval processes most commonly adopted have been devised with traditional on-site built construction and procurement in mind.
  2. Unlike building contractors, who are usually familiar to the quantity surveyors and the banks, offsite manufacturers are not. This introduces an additional ‘unknown’ into the credit approval process for project construction funding. With ‘unknowns’ translating into additional risk for the project, this works against obtaining funding approval. And the greater the offsite construction element of the project, the more this becomes an issue.
  3. Central to the benefits of offsite construction is the program (time) savings on site during construction. The extent to which this is reflected in the bank funding table calculations will depend on the quantity surveyor’s own experience with similar projects, and the bank assessment of the achievability of the shorter construction program. Where the program benefits are not largely recognised, the offsite construction avenue will be disadvantaged against industry benchmarks, making funding assessment and approval more problematic.
  4. Security for bank construction funding is typically via a mortgage over the project site. With each facility drawdown occurring upon certification by the quantity surveyor of the works completed on site to date, there is a close nexus between the construction funding drawn down (the bank’s exposure to the project) and the underlying security. Construction occurring in a factory separate to the project site does not fit the normal model and creates additional complexity and uncertainty.
  5. The standard forms of contract become less applicable as the offsite component of a project becomes greater, especially when the client has nominated the prefab/offsite manufacturer as the preferred supplier. Overcoming this requires additional drafting of contract documentation, adding cost and complexity. In instances where the head contractor sources offsite elements themselves as part of their project procurement, the arrangements are principally between the contractor and the supplier and are less likely to impact the construction contract.

Should you be aware of active sources of funding for offsite construction and prefabricated projects, I would be very pleased to hear about them. I am confident that the offsite construction industry players would be very keen to learn about and explore such funding opportunities.

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  1. David Chandler

    Warren, you will recall that we have had this discussion on a number of occasions – What is the problem that needs to be solved? Your article infers that it is getting off-site manufacturers paid. I assert that the problem is giving the end consumer and their financiers greater certainty. That is construction's traditional problem. Industry standards aspire to 'minimums' and compliance regimes are not filling customers with confidence either. The industry has a culture of 26 and 52 week warranty periods then they want the fault line drawn in the sand. The problem is how does off-site embrace a culture of 'whats the better deal for the customer?" Surely quality control is easy in this process, its what happens after? Remember, the sum of the parts must make the whole and add up accordingly. This means a single point of product underwrite for customers that picks up the entire value chain. No weasel out product warranties or vendors, here one day gone the next. In the UK the offsite industry has developed a product headed in this direction. I was excited to see a number of apps on display at the Victorian Construction Innovation Summit that offer the possibility to improve the industry's abysmal progress payment systems and at the same time embed a 'chain of custody' QA system that will be a huge step in the right direction. And organisations like PrefabAUS must put a peg in the sand on where it stands on membership integrity, brand value and what the organisation aspires to on behalf of the industry's customers. If its the status quo, and don't upset the members then nothing will change and as it should, the payment for for off-site will continue to vex your members.