Modular construction: Public procurement law hurdles in serial construction

More and more municipalities are turning to modular construction for functional buildings with typical uses, such as daycare centers, fire stations, and school buildings. The federal government also sees serial construction as a contribution to solving the housing shortage. 

Modular construction describes the erection of largely standardized buildings with type approval. The structure is assembled according to the modular principle from large-format components (modules) that are prefabricated in series at the manufacturer's plant. These range from individual supporting structures to completely pre-assembled, three-dimensional room units (e.g., containers). The modules are delivered to the construction site ready for assembly and are simply fixed, joined, and connected there. 

Modular design increasingly in demand 

The advantages include shorter construction times, standardized processes, lower risks of weather-related delays, high cost certainty, reduced impact on the construction site environment, as well as greater flexibility and cost-effectiveness. 

Whereas in conventional construction numerous individual trades are carried out by different contractors, in modular construction the module supplier regularly acts as the general contractor, providing a turnkey service at a flat rate. 

Hurdles under public procurement law 

However, public procurement law takes a critical view of such single contract awards and imposes strict limits on them. Primarily in the interest of protecting small and medium-sized enterprises, which it is expressly obliged to do by law (in addition to the goal of economical public procurement) (Art. 97 (4) sentence 1 GWB (German Act Against Restraints of Competition)), it generally requires the services to be procured to be divided as far as possible into (qualitative) trade-specific or (quantitative) partial lots. 

Nevertheless, there are various justification approaches that could pave the way for single contract awards of modular construction services in compliance with public procurement law. 

These will be outlined below. 

Right to determine performance 

The public contracting authority's decision in favor of a particular construction method – such as modular construction – can be justified in individual cases by its right to determine performance. In its procurement decisions, the public contracting authority is generally not bound by law and largely free: it determines what is to be procured. This decision precedes the actual award procedure and its legal structuring. 

The consideration of how to optimally solve the task requiring procurement is also the responsibility of the public contracting authority itself. Public procurement law therefore does not regulate what is procured, but only how this is to be done. 

According to case law, the public contracting authority requires comprehensible, objective, and contract-related reasons for making a specific decision, such as in favor of a modular instead of a conventionally constructed daycare center. The performance specification must be non-arbitrary and must not discriminate against other economic operators. In view of the market-restricting effect of a single contract award for modular construction services, these objective reasons must be set out and documented in a comprehensible manner in the tender documents.  

However, critical voices in literature and case law are increasingly interpreting the requirement to divide contracts into separate lots as part of the right to determine performance. For example, the Munich Higher Regional Court emphasizes that procurement autonomy does not give carte blanche for a single contract award. The integration of upstream planning and downstream construction services into a single contract by a general or total contractor is particularly problematic. Referring to the fundamental (trade-specific) divisibility of planning services, the Higher Regional Court of Rostock considers such integration, which it regards as a means of achieving the procurement objective, to be inadmissible under public procurement law. 

Lack of divisibility of performance 

Regardless of the scope of the right to determine performance, the single contract award for a serial modular construction project is not contrary to the requirement to divide contracts into separate lots if it is not actually possible to reasonably divide the overall modular construction work into trade-specific lots.  

This may be the case if the services can be assigned to a uniform specialist branch of the construction industry and – in view of the market structure – cannot be provided by different specialist companies. An established “trade-specific lot for modular fire station construction” would be a possible example in this respect. 

Modular construction is increasingly characterized by standardization. Factory prefabrication and subsequent assembly of the modules on the construction site significantly reduce construction time, but also mean that individual trades can hardly be separated technically. Although services such as plumbing, electrical work, or roofing could theoretically be outsourced, there are often practical obstacles: manufacturers often only offer fully integrated solutions that are tailored to internal processes and specific anchoring systems. Separating individual trades carries the risk of technical interface problems, increased coordination effort, and possible incompatibilities – especially in safety-relevant buildings. 

In these cases, too, the reasons for the assumed indivisibility of the services must be documented in detail. 

In this context, the inclusion of planning services must once again be assessed strictly. In particular, it must be clearly explained why there is no independent market for certain planning phases. This may be the case, for example, with work planning (service phase 5 HOAI), as this regularly requires in-depth knowledge of the manufacturing process at the module manufacturer, which is hardly available outside the manufacturer's premises. 

Exception in individual cases 

Ultimately, a single contract award for serial modular construction services to a general contractor may also be permissible in exceptional cases pursuant to Art. 97 (4) sentence 3 GWB if required due to economic or technical reasons. 

This requires comprehensive, documented consideration taking into account both the reasons for and against the single contract award. Economic and technical aspects must be explicitly stated and substantiated. The requirements of case law are strict in this regard – exceptions are not automatically admissible. 

The decisive factor is that the decision is not based solely on wishful thinking: the desire for economies of scale, shorter construction times, or less coordination is not sufficient to avoid a division into partial lots. 

Here too, planning services such as approval or work planning must be considered in a differentiated way. Even if they can generally be divided into partial lots, their inclusion in a single contract may be permissible if the contracting authority can convincingly demonstrate that separate awarding by partial lots is not appropriate in the specific case. 

Conclusion: Legally compliant single contract awards must be carefully prepared 

As a general rule, public contracting authorities wishing to award contracts to a general contractor or total contractor for serial construction projects must clearly present, objectively justify and carefully document their arguments. 

With the right preparation and a sound rationale, single contract awards in a legally compliant manner are possible. Municipalities, authorities, and public companies can then benefit from the advantages of serial construction.  

Many thanks to Dr. Peter Czermak for his valuable support in writing this article.