Australia’s residential modular construction sector is experiencing significant momentum, driven by both market demand and strategic policy shifts. Since our article in December 2023 where we discussed the “Insurance challenges for clients and contractors in residential modular construction” there have been changes in both banking and government policy which are shaping a new era for prefabricated and modular housing.
Shifting financing models
Traditionally, owners seeking modular homes faced a critical funding gap as banks would only provide finance after the building was installed onsite and in possession of the proposed borrower. This meant that modular homeowners were often required to self-fund the project throughout the fabrication phase without bank support.
In a notable policy shift, the Commonwealth Bank of Australia (CBA) now allows buyers to access progress payments throughout the fabrication process. This approach eases the financial strain for borrowers, supports manufacturers, and provides a more structured financing model. The CBA has also agreed to sponsor the development of a new standard-form contract for the modern methods of construction (MMC) sector to help support home buyers and manufacturers. Existing standard-form contracts are only suitable for traditional on-site construction and do not work for MMC such as prefabricated or modular homes where homes are generally built off-site.
The Albanese government is prioritising easier financing for prefab homes, with Treasurer Jim Chalmers and Industry Minister Ed Husic announcing efforts to encourage banks, superannuation funds, and institutional investors to address longstanding barriers to financing in this sector.
Why the push for prefab and modular construction?
Australia’s housing market faces acute challenges. Rising costs, persistent demand driven by a growing population, record-low rental vacancy rates, declining homeownership, especially among younger Australians, and growing homelessness are all contributing factors. Social housing waitlists are lengthening, and governments have set ambitious new housing supply targets to address affordability and availability of housing.
A key factor driving support for modular construction is productivity. According to the Productivity Commission, physical productivity in housing construction has halved over the past 30 years, and even after adjusting for quality improvements, it remains 12 per cent lower than in previous decades. Builders are producing fewer homes when looking at the per hour worked data which is contributing to increased costs and longer build times. Prefabricated and modular construction offers a compelling solution: these homes can be built in a fraction of the time and at lower cost, with less waste. Productivity Commission modelling suggests that widespread adoption could cut construction costs by up to 20 per cent and halve overall build times.
Barriers to adoption
Despite its promise, operators looking to establish prefab and modular construction businesses face significant startup costs including the establishment of a factory, training workers, and sourcing materials, all of which require substantial initial investment. The cost benefit of prefab and modular construction is all about volumes and achieving economies of scale, but consumer preferences for home design remain diverse and unpredictable which pose challenges to standardisation and mass production.
Many people question the quality of prefab and modular buildings, often assuming that their affordability means they are of lower quality. However, this is not necessarily true. There have also been concerns about the structural integrity of such buildings, particularly their ability to withstand extreme events like high winds, heavy snowfall, or even vehicle collisions. This was the case in the UK, where entire schools were closed due to safety concerns. It’s important to note that in the case of schools in the UK, the issues were primarily linked to the work of a specific contractor, rather than the inherent quality of prefab or modular construction.
Legislative and regulatory developments
The federal government has launched a $900 million productivity fund to help states and territories remove barriers to modern method of construction (MMC), including prefab and modular construction. Their goal is to clarify regulatory pathways for prefabricated and modular housing through a new guidance paper and to conduct a comprehensive review aimed at reducing regulatory red tape. At the same time there has been heavy investment in workforce training, such as the $50 million TAFE centre in Melbourne, which aims to build and develop advanced construction skills.
To support this, The Australian Building Codes Board (ABCB) has released a dedicated handbook on prefabricated, modular, and offsite construction, designed to help stakeholders better understand how to achieve compliance with the National Construction Code (NCC).
The ABCB also launched consultations on a proposed risk-based building product registration scheme. According to the discussion paper, this initiative could boost the adoption of offsite manufacturing by reducing regulatory uncertainty for product suppliers, builders, and approval authorities.
The Government has also announced additional funding for a voluntary certification scheme in an attempt to streamline the approval process for prefabricated housing under the NCC.
Australian state and federal governments signed an intergovernmental agreement to implement a 10-year national program to reform competition policy which will include updates to regulation and certification processes for MMC.
However, industry leaders like former NSW Building Commissioner David Chandler emphasise the need for stronger leadership and practical expertise. Fragmented practices and inconsistent data across jurisdictions remain significant barriers to productivity.
Key insurance considerations for contractors in modular construction
The insurance risk profile for residential prefabricated and modular construction is “unique” and distinct from traditional building methods. While offsite fabrication helps reduce certain risks, such as weather-related damage, it introduces new hazards in the form of transport and installation. Moving completed modules by truck exposes them to vibration, accidental damage, and traffic incidents. The process of craning (lifting) modules onto site also carries significant risks. Additionally, insurers must consider the potential for large-value losses during fabrication and storage, where modules may be vulnerable to fire, flood, or theft.
A further complication arises from the risk of design errors at the manufacturing stage, which can be replicated across multiple units, amplifying potential losses. One of the main challenges for insurers is determining whether modular construction should be treated as the delivery of a manufactured product or as a constructed building.
Traditionally, construction is classified as a service, while prefabricated modules are often considered goods. This distinction is crucial, as professional indemnity (PI) insurance typically covers services like design but may exclude claims related to the supply of goods or product failures.
To prevent coverage gaps and contractual disputes, it is essential for all parties to clearly define the chain of responsibility from factory, to transport to onsite teams (particularly where installation is carried out by separate contractors to the supplier of the modules). Liability should be carefully assigned across every stage of the project-including design, manufacturing, transport, cranage (lifting), and onsite installation.
Prospective buyers and constructors of modular buildings must carefully consider a range of risks. Effectively managing the potential for loss or damage to building segments, as well as any related liabilities, is essential. Taking these precautions helps ensure that all parties are adequately protected throughout the modular construction process.
Outlook
Prefabricated and modular construction is set to become a key part of Australia’s future housing landscape. Ongoing policy reforms, innovative financing solutions, and increased industry investment are helping to break down many of the traditional barriers to adoption. However, significant challenges persist. As the sector continues to grow, all stakeholders will need to carefully manage complex insurance requirements, regulatory changes, and shifting market conditions to fully unlock the benefits of these modern building methods.
