Fred Hedberg | Construction Law Zone
Modular construction is literally on the rise. It is rapidly displacing traditional stick-built construction for new commercial, industrial and residential buildings. Over the past decade, an increasing number of health care, education facilities and apartment buildings have been built using modular construction. As the need for housing, and especially affordable housing, has grown as a result of the COVID-19 pandemic, modular construction is becoming increasingly popular.
Recently, the Canadian government, through the Canadian Mortgage Housing Corporation, launched a “Rapid Housing Initiative,” a $1 billion program utilizing only modular construction to rapidly construct affordable housing for its citizens. Similarly, the city of Toronto (which last year approved a plan to build 250 modular homes in response to homelessness) plans to build 1,000 modular homes by 2030. The pandemic also has resulted in an urgent demand for modules for medical facilities and schools. Modular construction allows contractors to build “leaner” and “greener” buildings while increasing quality control and improving site safety and potentially saving valuable time and money.
The modular process involves unique commercial and legal challenges not present in traditional contracting. In order to successfully navigate these challenges and to properly allocate risk, a well-drafted contract is important. Key legal considerations in drafting such contracts include:
- different governing laws if the fabrication site is located in a jurisdiction other than the project or worksite;
- the applicable law – common law or the Uniform Commercial Code (UCC);
- insurance and bonds;
- risk of loss at various points of transfer during the project; and
- proper quality assurance and control.
Recognizing the rise in modular construction and its unique legal issues, ConsensusDocs published last October the first-ever industry standard contract – ConsensusDocs 753, Standard Agreement Between Constructor and Prefabricator, for a common type of modular construction, an off-site prefabrication of a component delivered and installed at a worksite. This contract is a useful resource for drafting modular construction contracts.
GOVERNING LAW
A key legal consideration for modular projects is the governing law, especially if the fabrication site is located in a different jurisdiction than the project site. The governing law determines applicable building codes, licensing, permitting and safety requirements, labor relations, and the applicable statutes of limitation and repose. While most states apply the International Building Code, as amended, in the absence of a uniform modular construction building code, some states have amended their building codes to account for modular construction. ConsensusDocs 753 contains several key defined terms, including:
- Components ̶ the prefabricated elements constructed at the Fabrication Site prior to installation at the Worksite;
- Fabrication Site ̶ the physical location(s) of the facility or facilities where the Components are constructed;
- Worksite ̶ the geographical area of the project location; and
- Carrier ̶ an independent, commercial shipping/transport contractor contracted by the Prefabricator to deliver the Components to the Worksite.
ConsensusDocs 753 provides that the law in effect at the location of the project controls, except that parties can agree (where permitted by law) that the law governing the Components’ construction, transport and installation shall be either common law or the UCC to the extent either is in conflict with the law in effect at the project location. Consequently, it is crucial to identify the locations of the Fabrication Site and Worksite in any modular construction contract.
Modular projects must comply with licensing and permitting requirements outlined in state and local building codes. ConsensusDocs 753 provides that the work shall comply with the state and local licensing requirements of the state where it is performed; to the extent allowed by law, the state and locale in which the Fabrication Site is located shall govern all licensing requirements relating to the construction of the Components. Safety concerns and Occupational Safety and Health Administration regulations should be considered in developing a prefabrication process for the Components, transporting them to the Worksite and using cranes and other equipment to lift them into place.
Prefabricators may need to comply with OSHA regulations regarding permitting and training if building the Components constitutes a confined space as defined by OSHA. Labor-related issues also should be considered for modular projects. ConsensusDocs 753 provides that labor and/or collective bargaining agreements shall apply to the work performed at the Worksite, but not to work performed at the Fabrication Site. Parties also should closely analyze statutes of limitations and repose for potential claims since they are based on the applicable governing law and whether the claim arises from a written contract, a sale of goods under the UCC, or a product deficiency.
COMMON LAW OR THE UCC
Another key legal consideration is whether common law or the UCC governs the construction, transport and installation of the Components, since modular construction is often viewed as a hybrid transaction combining both goods and services. The UCC applies only to transactions in goods, not to contracts purely for services. If the contract is silent, courts typically apply a “predominant factor” test to determine whether the provision of goods or of services is more important to the overall transaction. If the transaction primarily involves the sale of goods, the UCC applies; if the sale of goods is ancillary to services, common law governs the transaction. While a few courts have applied the UCC to contract provisions dealing with goods, most courts have found modular construction contracts to be primarily for services.
ConsensusDocs 753 is consistent with the majority of courts, stating that the work to be performed includes labor, materials, equipment, Components and services provided within its scope of work and performed at the Fabrication Site and Worksite (the “Subcontract Work”). To avoid application of products liability law and the UCC as well as rules generally not appropriate for construction projects, prefabricators should consider contracting as subcontractors, not suppliers. Accordingly, prefabricators might enter into agreements such as ConsensusDocs 753, rather than purchase orders, clearly stating that they are building modules to plans and specifications, rather than designing a product.
INSURANCE AND BONDS
Insurance- and bond-related issues should be carefully considered for modular projects. Prefabricators should ensure that insurers issuing policies are licensed in the jurisdiction(s) of the Fabrication Site and the Worksite. ConsensusDocs 753 requires the owner or constructor to purchase and maintain builder’s risk insurance to protect insureds from damage and loss to Subcontract Work occurring during storage or installation of that work at the Worksite.
Thus, since Components are part of the Subcontract Work under ConsensusDocs, they are typically covered by builder’s risk insurance while being stored or installed at the Worksite. However, if Components are stored offsite after leaving the Fabrication Site, prefabricators should research whether a rider to the builder’s risk policy is necessary. Furthermore, because most of the work in modular construction is performed off-site at the Fabrication Site, Owner- or Contractor-Controlled Insurance Programs (OCIP/CCIP) may not be feasible since the labor performed at the Worksite often does not meet minimum requirements to qualify for such programs.
Fabricators also may be required to furnish performance and payment bonds. ConsensusDocs 753 provides that such bonds must be issued by a surety admitted in the state in which the Fabrication Site and the Worksite are located, and that they shall apply to and cover performance and payment for all Subcontract Work, whether such work occurs at the Fabrication Site or Worksite.
RISK OF LOSS
Risk of loss should be carefully considered in drafting modular construction contracts. If the Fabricator is a supplier of goods, the UCC should govern the transaction and risk of loss passes to the Constructor upon receipt of the Components. However, if the Fabricator is a subcontractor performing services, the risk of loss might pass on tender of delivery under the common law.
ConsensusDocs 753 provides that risk of loss shall be upon the Prefabricator until the Components are physically delivered to the Constructor at the Worksite or other authorized location, unless otherwise agreed to or covered by builder’s risk insurance. It also defines responsibilities for the protection of the Subcontract Work during prefabrication, damage occurring during transportation and delivery, and damage occurring post-delivery, where such work is, is to be, or is not to be installed by the Prefabricator.
The Prefabricator shall promptly remedy property damaged while in its care, custody and control or during transportation. It also shall take necessary precautions to properly protect the Subcontract Work from the time of delivery to the completed installation if it is to install that work; otherwise, the Constructor shall do so upon delivery to the Worksite.
Quality assurance and quality control also are key considerations when drafting modular construction contracts to protect against risk of loss and damage. ConsensusDocs 753 requires the Prefabricator not to release any Components to a Carrier, unless and until the Constructor confirms to the Prefabricator that each such Component conforms with the Subcontract Documents and has satisfied any and all quality assurance/quality control protocols established for the inspections of Components at the Fabrication Site.
ConsensusDocs 753 also obligates the Prefabricator to schedule all required tests, approvals, and inspections of all Subcontract Work performed at the Fabrication Site and the Worksite. It also gives the Constructor the right to enter the Fabrication Site to inspect the Subcontract Work, including stored materials, completed Components and partially completed Components.
CONCLUSION
A well-drafted contract is often the key to the success of any construction project. This is especially true for modular construction projects, which involve complex commercial and legal issues that should be carefully considered when drafting contracts for these unique projects.
ConsensusDocs 753 is an industry standard form agreement that addresses key issues pertaining to these hybrid transactions. It is imperative that parties understand the law governing all aspects of these transactions, from off-site fabrication to transport and delivery to storage to installation, in order to satisfy all applicable building codes, including licensing and permitting requirements, safety and OSHA regulations, labor agreements and insurance and bonding requirements for these projects. Therefore, parties are encouraged to seek competent counsel to review and advise on particular legal considerations unique to anticipated transactions involving modular construction.