Stewart Milne will also support L&Q on bids for standalone contracts in the open market.
The deal forms a key part of L&Q's Modern Methods of Construction (MMC) strategy which will see all of its new build homes delivered with some form of MMC by 2025 and an entirely off-site manufactured home completed by 2028.
L&Q has plans to build 100,000 homes over the next ten years.
Fiona Fletcher-Smith, Group Director of Development and Sales at L&Q, said "We are excited to be collaborating with Stewart Milne Timber Systems on our modern methods of construction programme.
"Offsite manufacturing offers a range of exciting opportunities, speeding up the delivery and build quality of our developments whilst reducing the costs of projects."
Stewart Milne Timber Systems were selected after demonstrating their ability to design, manufacture, supply and erect residential units up to six storeys tall.
"This strategic alliance and collaboration will allow L&Q to deliver on a number of fronts and we believe they are setting the standard for how we should approach the housing shortfall across the UK."
The closed-panel timber frame structures will initially be used in the construction of L&Q's new Counties developments at Birnam Mews, Tiddington and Saxon Reach, Milton Keynes, with the first deliveries in Spring 2019.
L&Q's Academy will accompany this with investment in upskilling apprentices and staff in MMC techniques.